The Q3 earnings season, which is over for most of the 16 Zacks sectors, has unveiled a rosy picture with many companies reporting better-than-expected earnings. According to the latest Earnings Outlook, 78.7% of the 488 S&P 500 companies that have reported thus far having outperformed earnings estimates.
This is highly encouraging as an earnings beat generally leads to stock price appreciation. Investors like to add outperformers to their portfolios, which can fetch them handsome returns
Market Volatility on the Rise
Despite the impressive Q3 performance, the U.S. equity market has been witnessing a roller coaster ride over the past two months. While trade-related tensions with China continue to be a source of worry, expectations of higher interest rates in the near future and plunging crude oil prices have also increased investors’ concern. Moreover, the decline in technology stocks has further added to concerns.
The heightened volatility is reflected in the significant increase in the CBOE Volatility Index (VIX).
Proper Guidance - A Must in this Scenario
With market participants gripped by fears on the one hand and robust earnings numbers on the other, selecting potential winning stocks is a difficult task.
Furthermore, with a huge number of stocks available in the market at any point of time, spotting potential outperformers 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’.
Additionally, with time at a premium these days, it is next to impossible for investors to go through the extensive process. Given this backdrop, it is in the best interest of investors to seek guidance from “experts in the field." The concerned experts are brokers.
Broker Advice to the Rescue
To avoid such confusion, investors, more often than not rely on guidance provided by brokers who are deemed to be experts in the field. The opinion of brokers is highly sought after by investors as they have a clear insight into the nitty gritty of the investment world. Individual investors, more often than not, do not have access to such detailed and well-researched information.
Out of the three types of brokers (sell-side, buy-side and independent) present, sell-side analysts are the most common. They are employed by various brokerage firms to provide unbiased opinion on stocks. Meanwhile, buy-side analysts are employed by hedge funds, mutual funds and others while independent analysts directly sell their reports to investors.
Brokers revise their earnings estimates after carefully examining the pros and cons of an event for the concerned stock. Naturally, their stock related actions (upgrade or downgrade) serve as an invaluable guide as far as fixing target price of stock (s) is concerned.
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 positive estimate revisions 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 effective.
# (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:
ArcBest Corporation (ARCB - Free Report) provides freight transportation services and solutions. This Zacks Rank #1 (Strong Buy) company is based in Fort Smith, AR. The Zacks Consensus Estimate for current-year earnings has increased 18% in the past 60 days. You can see the complete list of today’s Zacks #1 Rank stocks here.
EnLink Midstream (ENLC - Free Report) is headquartered in Dallas, TX. This Zacks Rank #2 company focuses on providing midstream energy services in the United States. The company is involved in natural gas gathering, treating, processing, transmission, distribution, supply and marketing, and crude oil marketing. The Zacks Consensus Estimate for current-year earnings has risen 91.7% over the past 60 days.
American Airlines Group (AAL - Free Report) operates more than 6,700 daily flights to over 330 destinations in more than 50 nations across the globe from its hubs. This Zacks Rank #3 airline behemoth is headquartered in Fort Worth, TX. The company has an impressive history with respect to earnings per share. It outshined the Zacks Consensus Estimate in each of the trailing four quarters, with an average beat of 2%.
Avis Budget Group (CAR - Free Report) provides vehicle rental services through a network of approximately 10,000 car and truck rental locations in the United States, Canada, Australia, New Zealand, Latin America, the Caribbean, and parts of Asia. This Zacks Rank #3 stock has seen the Zacks Consensus Estimate for current-quarter earnings being revised 93.8% upward over the past 60 days.
California Resources Corporation (CRC - Free Report) is an oil and natural gas explorer with operations focused exclusively in the state. The company has a Zacks Rank #2. In the past 30 days, two earnings estimates have moved north, while none moved south for the third quarter. The Zacks Consensus Estimate for current-year earnings is projected to increase more than 100% from 2017 levels.
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.