The picture to have emanated from Q4 releases so far is an impressive one. The top and the bottom lines of S&P 500 companies that have reported so far have expanded 8.5% and 18.3%, respectively on a year-over-year basis, according to the latest Earnings Outlook.
While 58.3% companies beat expectations on the revenue front, 77.8% companies outpaced the Zacks Consensus Estimate with respect to earnings. Generally, an earnings beat by a company leads to an uptick in its stock price. Investors 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 make it even more difficult for individual investors to select outperformers in their portfolios in the absence of proper guidance.
Broker Advice to the Rescue
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.
The 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.
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 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:
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. American Airlines is headquartered in Fort Worth, TX and carries a Zacks Rank #2 (Buy). The Zacks Consensus Estimate for 2019 earnings has increased 7.9% in the past 60 days. You can see the complete list of today’s Zacks #1 Rank (Strong Buy) stocks here.
ArcBest Corporation (ARCB - Free Report) , based in Fort Smith, AR, provides freight transportation services and solutions. This Zacks Rank #2 stock has seen the Zacks Consensus Estimate for 2019 earnings being revised upward to the tune of 2.9% over the past 60 days.
AmerisourceBergen (ABC - Free Report) is based in Chesterbrook, PA. The Zacks Rank #3 (Hold) pharmaceutical services company focuses on providing drug distribution and related services to reduce health care costs and improve patient outcomes. The company has an impressive history with respect to earnings surprises, having outshined the Zacks Consensus Estimate in each of the trailing four quarters. The average positive surprise is 6.9%.
Cardinal Health (CAH - Free Report) is a nation-wide drug distributor and provider of services to pharmacies, healthcare providers and manufacturers. It is based in Dublin, OH. The company, carrying a Zacks Rank #3, has an expected earnings per share growth rate (next 3 to 5 years) of 6.2%. Moreover, it has an impressive earnings track record, having surpassed expectations in three of the trailing four quarters with the average positive surprise being 9.3%.
CVS Health Corporation (CVS - Free Report) is based in in Woonsocket, RI. The pharmacy innovation company carries a Zacks Rank #2. It has a three-five year EPS growth rate of 10.9%. The Zacks Consensus Estimate for 2019 earnings has increased 1.2% in the past 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.
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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.