With the Q3 earnings season about to begin, investors look to add stocks that have the potential to surpass expectations. This is because an earnings beat generally leads to stock price appreciation.
However, the task of designing one’s portfolio with potential outperformers is anything but an easy one. In fact, equity market tricks are not easy to master with a number of stocks flooding the space at any point of time. The task becomes even more difficult when one tries to devise a winning portfolio without proper guidance.
Given time constraints, it is in the best interest of investors to be guided by experts in the field.In view of the above arguments, it can be safely stated that it is in the best interest of investors to pay heed to the opinion of brokers while deciding their course of action (buy, sell or hold) on a particular stock.
Broker Ratings Hold the Key
Broker ratings are backed by sound logic and are by no means arbitrary. Since brokers closely follow the stocks in their coverage, they revise earnings estimates only after carefully examining the pros and cons of an event for the concerned company.
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. In the event of estimates moving south, which can happen due to lower-than-expected earnings/modest sales or pipeline failure (for a biotech company), investors tend to offload the stock from their portfolio.
Making the Most of Broker Opinions
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 four 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 four 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:
Verso Corporation (VRS - Free Report) is a leading North American producer of coated paper. Over the past 30 days, this Miamisburg, OH-based company has seen the Zacks Consensus Estimate for 2018 and 2019 increase 53.7% and 46.7% to $3.09 and $4.68 per share, respectively. The stock sports a Zacks Rank #1 (Strong Buy). You can see the complete list of today’s Zacks #1 Rank stocks here.
AECOM (ACM - Free Report) specializes in providing integrated services for planning, construction and infrastructure maintenance. The Zacks Consensus Estimate for current-quarter earnings of this Zacks Rank #2 (Buy) stock has been revised 3.8% upward over the past 90 days.
Dillard's Inc. (DDS - Free Report) is a large departmental store chain featuring fashion, apparel and home furnishings. This Zacks Rank #3 (Hold) stock has an impressive expected earnings per share growth rate of 9.7% for three to five years.
Casey's General Stores, Inc. (CASY - Free Report) is based in Ankeny, IA. It operates convenience stores under the Casey's and Casey's General Store names in 16 Midwestern states, mainly Iowa, Missouri and Illinois. The Zacks Consensus Estimate for current-year earnings of this Zacks Rank #3 stock has been revised 2% upward over the past 60 days.
Best Buy Co., Inc. (BBY - Free Report) operates as a retailer of technology products, services, and solutions in the United States, Canada, and Mexico. The company carries a Zacks Rank #2. It has an impressive record with respect to earnings per share, having outpaced the Zacks Consensus Estimate in three of the past four quarters. The average beat is 8.9%.
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.