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5 Stocks on Cloud Nine After Recent Broker Rating Upgrades

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The Q2 earnings season is in full swing with multiple companies having already reported their quarterly financial numbers. The picture that has emanated is an extremely healthy one with the top and the bottom lines of the S&P 500 companies expanding 9.3% and 23.9% respectively on a year-over-year basis, according to our Earnings Preview report.

While 80.1% companies outpaced the Zacks Consensus Estimate with respect to earnings, 73.8% beat expectations on the revenue front. Generally, an earnings beat by a company generally leads to an appreciation in its stock price. Given this highly bullish backdrop, investors would like to add outperformers to their respective portfolios for healthy returns.

However, the task is far from easy with a plethora of companies present in the market. Moreover, the complexities associated with the stock market makes it even more difficult for individual investors to select outperformers in their portfolios in the absence of proper guidance.

Broker Advice - An Invaluable Guide

The requisite guidance to design a winning portfolio comes from brokers. Brokers, not only scrutinize the publicly available financial documents, but also attend company conference calls and other presentations.

Since brokers arrive at their recommendation (buy, sell or hold) on a stock after thoroughly analyzing the company fundamentals, it is natural for investors to be guided by the direction of estimate revisions while deciding their course of action on a particular stock. Estimate revisions serve as an important pointer regarding the price of a stock. 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.  To take care of the earnings performance, we have designed a screen based on improving analyst recommendation and upward estimate revisions over the last four weeks.

Winning 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.

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).

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 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:

Dean Foods Company (DF - Free Report) , based in Dallas, TX, is a leading processor and distributor of milk and other dairy products in the United States as well as a leading manufacturer of various specialty food products. Over the last 60 days, the Zacks Consensus Estimate for this Zacks Rank #2 (Buy) company rose 4.8% to 65 cents for 2018.

You can see the complete list of today’s Zacks #1 Rank (Strong Buy) stocks here.

Archer Daniels Midland Company (ADM - Free Report) is one of the leading food processing companies in the world. This Illinois-based company sports a Zacks Rank #1. The company has an impressive track record with respect to earnings per share, having outshined the Zacks Consensus Estimate in three of the last four quarters. The average beat was 18.6%.

Hub Group, Inc. (HUBG - Free Report) is a transportation management company that provides multi-modal solutions throughout North America, including intermodal, truck brokerage, dedicated and logistics services. The stock, sporting a Zacks Rank #1, has seen the Zacks Consensus Estimate for current-year earnings being revised upward to the tune of 1.2% over the last 60 days.

Arrow Electronics, Inc. (ARW - Free Report) , which provides products, services and solutions to industrial and commercial users of electronic components and enterprise computing, has a Zacks Rank #2. The expected EPS growth rate for 3-5 years is currently 9.4%.

Echo Global Logistics Inc. (ECHO - Free Report) is a leading provider of technology enabled transportation and supply chain management services. The company has expected earnings per share growth rate of 89.6% for the current year. The stock, sporting a Zacks Rank #1, has seen the Zacks Consensus Estimate for current-year earnings being revised upward to the tune of 14% over the last 60 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.

Click here to sign up for a free trial to the Research Wizard today.

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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