The Q1 earnings season is in full swing with a deluge of companies reporting their financial numbers each day. The picture that is evolving is an extremely rosy one. According to our latest Earnings Preview report,  76.8% of the companies have reported better-than-expected earnings per share in the current reporting cycle.

Generally, an earnings beat leads to an uptick in a company’s stock price. Given this highly bullish backdrop, it is natural that investors would like to add outperformers to their respective portfolios for healthy returns.

However, with a plethora of earnings reports flooding the market during the reporting cycle, pinpointing outperformers or well-performing stocks is by no means an easy task for individual investors. In the absence of proper guidance, identifying a winning stock is akin to searching for ‘a needle in a haystack’, for an investor. Proper guidance, in this respect, comes from brokers, who are deemed to be experts, equipped with vast knowledge and know how as far the field of investing is concerned.

Of the three types of brokers/analysts (sell-side, buy-side and independent) present in the investment world, sell-side analysts are most common. Various brokerage firms employ them to provide unbiased opinion to investors after thorough research. Buy-side analysts are employed by hedge funds, mutual funds etc. while the independent ones simply sell their reports to investors.

Brokers, not only scrutinize the publicly available financial documents, but also attend company conference calls and other presentations. Naturally, it is in the best interest of investors to pay heed to such well-researched information as they aim to generate maximum returns from their portfolio.

Earnings Estimate Revisions – An Useful Guide

Since brokers indulge in thorough research, the question of their actions being arbitrary does not arise. Therefore, the direction of estimate revisions by brokers serves as an important pointer regarding the price of a stock. In fact, a rating upgrade normally leads to stock price appreciation and vice versa.

One of the well-accepted investment strategies is to maintain a diversified portfolio to generate handsome returns irrespective of the market conditions. For instance, in the face of extremely low oil prices, analysts adopt a bullish stance on airline stocks and consequently raise estimates. Naturally, adding such stocks to one’s portfolio in such a scenario might prove to be a winning strategy. Similarly, analysts might turn bearish and trim estimates, thereby downgrading a stock, following adverse events like lackluster earnings or pipeline failure (for a biotech player). Naturally, investors would look to get rid of such stocks from their portfolio on the basis of broker advice.

To take into account earnings performance, we have designed a screen based on improving analyst recommendation and upward estimate revisions over the last four weeks.

Ignore the Top Line at Your Peril

A strategy designed solely on the basis of the bottom line is unlikely to result in a winning strategy. Actually, according to many market watchers, a revenue beat is more creditable for a company, especially in an environment of revenue weakness due to macroeconomic headwinds like a strong dollar or lackluster demand for travel (which will hurt travel-focused companies). To address top-line concerns, we have included in our screen the price/sales ratio, which serves as a strong complementary valuation metric.

Screening Criteria

# (Up- Down Rating)/ Total (4 weeks) =Top #75: This gives the list of top 75 companies that have witnessed net upgrades over the last 4 weeks.

% change in Q (1) est. (4 weeks) = Top #10: This gives the top 10 stocks that have witnessed earnings estimate revisions over the past 4 weeks for the upcoming quarter.

To ensure that the strategy is a winning one, covering all bases, we have added the following screening parameters:

Price-to-Sales = Bot%10: The lower the ratio the better, companies meeting this criteria are in bottom 10% of our universe of over 7,700 stocks with respect to this ratio.

Price greater than 5: A stock trading below $5 will not likely create significant interest for most investors.

Average Daily Volume greater than 100,000 shares over the last 20 trading days: Volume has to be significant to ensure that these are easily traded.

Market value ($ mil) = Top #3000: This gives us stocks that are the top 3000 if one judges by market capitalization.

Com/ADR/Canadian= Com: This takes out the ADR and Canadian stocks.

Here are five of the 10 stocks that made it through the screen:

Archer Daniels Midland Company (ADM Quick QuoteADM - Free Report)   is one of the leading food processing companies in the world. It procures, transports, stores, processes, and merchandises agricultural commodities and products. This Zacks Rank #2 (Buy) stock witnessed the Zacks Consensus Estimate for current-year earnings being revised 2.5% upward over the last 60 days. You can see the complete list of today’s Zacks #1 Rank (Strong Buy) stocks here.

Dana Incorporated (DAN Quick QuoteDAN - Free Report) is a manufacturer and seller of driveline, sealing and thermal-management products for vehicle manufacturers. This Zacks Rank #2 stock witnessed the Zacks Consensus Estimate for current-year earnings being revised 5% upward over the last 60 days.

United States Steel Corporation (X Quick QuoteX - Free Report) is an integrated steel producer with major production operations in the United States and Central Europe. This Pittsburgh, PA-based Zacks Rank #1 company has an impressive earnings surprise history, having outpaced the Zacks Consensus Estimate in each of the past four quarters. The average beat is 56.7%.

KBR, Inc. (KBR Quick QuoteKBR - Free Report) is a global engineering, construction and services firm, supporting market segments of global hydrocarbons and international government services. This Houston, TX-based company has an impressive earnings surprise history, having outpaced the Zacks Consensus Estimate in three of the past four quarters. The average beat for this Zacks Rank #1 company is 14.1%.

Delek US Holdings, Inc. (DK Quick QuoteDK - Free Report) : Headquartered in Brentwood, TN, Delek US is a diversified downstream energy company with assets focused on refining, logistics, asphalt wholesale distribution of refined products, and convenience retail. This Zacks Rank #2 stock has an impressive expected earnings growth rate (three to five years) of 10%.

You can get the rest of the stocks on this list by signing up now for your 2-week free trial to the Research Wizard and start using this screen in your own trading. Further, you can also create your own strategies and test them first before taking the investment plunge.

The Research Wizard is a great place to begin. It's easy to use. Everything is in plain language. And it's very intuitive. Start your Research Wizard trial today. And the next time you read an economic report, open up the Research Wizard, plug your finds in, and see what gems come out.

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Disclosure: Officers, directors and/or employees of Zacks Investment Research may own or have sold short securities and/or hold long and/or short positions in options that are mentioned in this material. An affiliated investment advisory firm may own or have sold short securities and/or hold long and/or short positions in options that are mentioned in this material.

Disclosure: Performance information for Zacks’ portfolios and strategies are available at: https://www.zacks.com/performance.

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