The picture that has emerged from the Q1 earnings season is an extremely bright one. With only a handful of companies left to report, the season is expected to end on a high, displaying substantially higher earnings growth than witnessed in the recent quarters. Apart from significant year-over-year growth, a high proportion of companies have reported better-than-expected earnings per share.
Generally, an earnings beat leads to stock price appreciation. Given this favorable background, investors would like to add outperformers to their portfolios for healthy returns.
However, the task is easier said than done, especially for an individual investor. With a plethora of stocks flooding the market at a particular point of time, it is nearly impossible for an investor to go through the financials and other relevant details for each and every company before arriving at a decision (Buy, Sell or Hold). The time constraint that we all face these days makes the task even more difficult for individual investors.
This is where proper guidance is required. To prevent their hard-earned money from going down the drain, investors often than not pay heed to the advice of brokers while designing their respective portfolios.
Why Paying Heed to Broker Advice is a Good Practice
The opinion of brokers acts as a valuable guide for investors while deciding their course of action (buy, sell or hold) on a particular stock. Broker ratings are backed by sound logic. They have deeper insight into the happenings of a particular company as they directly communicate with management.
They undertake extensive research on the company’s publicly available financial statements apart from attending conference calls. In a bid to deepen their understanding of a particular stock, they sometimes converse with customers to find out their likes/dislikes about the products and services offered by the company.
In view of their expertise, it is prudent for investors to pay heed to broker advice while formulating their investment strategy for generating handsome returns. 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.
Earnings Estimate Revisions – A Proper Guide
As mentioned above, brokers closely follow the stocks in their coverage. Therefore, they revise earnings estimates only after carefully examining the pros and cons of an event for a particular company. In fact, a rating upgrade or downgrade by brokers has the potential to influence the price of the stock.
Naturally, when investors see brokers revising their estimates or recommendation on a stock, they often assume that there is something in the stock that has attracted analyst attention.In fact, a rating upgrade generally leads to stock price appreciation. Similarly, the price of a stock may plummet following a rating downgrade.
Estimates can move north for a number of reasons – favorable earnings performance, a bullish guidance, product launch or any favorable macro scenario.
Framing a Successful Strategy
The above write-up clearly suggests that by following broker actions, one can arrive at a winning portfolio of stocks. Keeping this in mind, we have designed a screen to shortlist stocks based on improving analyst recommendation and upward revisions to earnings estimates over the last four weeks.
Also, since the price/sales ratio is a strong complementary valuation metric in the presence of analyst information, it has been included. The price/sales ratio takes care of the company’s top line, making the strategy foolproof.
# (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).
We have also added the following screening parameters to ensure that the strategy is a winning one:
Price-to-Sales = Bot%10 (The lower the ratio the better, companies meeting this criteria are in the bottom 10% of our universe of over 7,700 stocks with respect to this ratio).
Price greater than 5 (as a stock trading below $5 will not likely create significant interest for most of the investors).
Average Daily Volume greater than 100,000 shares over the last 20 trading days (Volume has to be significant to ensure that these are easily traded).
Market value ($ mil) = Top #3000 (This gives us stocks that are the top 3000 in terms of 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:
Boise Cascade Company (BCC - Free Report) is one of the largest producers of engineered wood products and plywood in North America and a U.S. wholesale distributor of building products. The Zacks Consensus Estimate for current-quarter earnings increased 26.6% over the last 30 days. The stock sports a Zacks Rank #1 (Strong Buy). You can see the complete list of today’s Zacks #1 Rank stocks here.
New Albany, OH-based Commercial Vehicle Group Inc. is a supplier of cab-related products for the global commercial vehicle market, including the heavy-duty truck market, the construction and agricultural market and other specialized transportation markets. It carries a Zacks Rank #1. The consensus estimate for current-quarter earnings was revised 33.3% upward over the last 30 days.
Century Communities, Inc. (CCS - Free Report) is a home building and construction company. The company operates in major metropolitan markets in Colorado, Texas, Houston, Utah, Atlanta and Nevada. The Zacks Consensus Estimate for the current year improved 6.1% over the last seven days. The stock sports a Zacks Rank #1.
Echo Global Logistics Inc. (ECHO - Free Report) is a leading provider of technology-enabled transportation and supply chain management services, delivered on a proprietary technology platform, serving the transportation and logistics needs of its clients. The Zacks Consensus Estimate for the current year improved 16.1% over the last 30 days. The stock has a Zacks Rank #1.
Bunge Limited (BG - Free Report) is an integrated global agribusiness and food company spanning the farm-to-consumer food chain. This Zacks Rank #2 (Buy) company is based in White Plains, NY. The Zacks Consensus Estimate for the current year improved 57.1% over the last 30 days.
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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