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5 Stocks in Focus Following Broker Rating Upgrades

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The Q4 earnings season is almost over with the majority of the companies having already unveiled their quarterly financial numbers. A high proportion of companies have reported better-than-expected earnings in the reporting cycle.

Generally, an earnings beat by a company leads to an appreciation in its stock price. Given this backdrop, investors like to add outperformers to their respective portfolios for healthy returns.

However, with a deluge of earnings reports flooding the market, pinpointing 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’. The proper guidance, in this respect, comes from brokers, who are deemed to be experts, equipped with vast knowledge and know how as far the field of investing is concerned.

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.

Why Such Advice is Invaluable

Brokers, irrespective of their types, conduct thorough research of the stocks covered by them. They have at their disposal a lot more information on a company and its prospects than individual investors.  

To attain their objective, they go through minute details of the publicly available financial documents apart from attending company conference calls and other presentations.  Consequently, the opinion of brokers should act as a valuable guide for investors while deciding their course of action (buy, sell or hold) on a particular stock.

Direction of Earnings Estimates: A Winning Pointer

Since brokers follow the stocks in their coverage minutely, they revise their earnings estimates after carefully examining the pros and cons of an event for the concerned company. In fact, a rating upgrade or downgrade by brokers has the potential to immediately influence the price of the stock.

Since brokers arrive at their recommendation on a stock after thoroughly analyzing the nitty-gritties associated with the company, it is natural that if investors see them improving their recommendation on a particular stock, they are inclined to believe that there is a solid reason/logic behind it. 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. 

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.

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 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 the 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 eliminates the ADR and Canadian stocks.

Here are five of the 10 stocks that made it through the screen:

ABM Industries (ABM - Free Report) is headquartered in San Francisco, CA. The company provides engineering, janitorial, parking, and facility solutions to commercial, industrial, institutional, and retail facilities. ABM Industries, carrying a Zacks Rank #3 (Hold), has an impressive track record with respect to earnings, having surpassed the Zacks Consensus Estimate in three of the trailing four quarters with the average surprise being 1.2%.

Atlas Air Worldwide Holdings (AAWW - Free Report) is a provider of outsourced aircraft and aviation operating services across the globe.

The company is based out of Purchase, NY and carries a Zacks Rank #2 (Buy). The Zacks Consensus Estimate for the current year has improved 3.1% over the past 60 days. You can see the complete list of today’s Zacks #1 Rank (Strong Buy) stocks here.  

Diebold Nixdorf, Incorporated (DBD - Free Report) is the provider of connected commerce solutions to financial institutions. This Zacks Rank #2 Ohio-based company provides automatic teller machines, financial and point-of-sale services. The Zacks Consensus Estimate for the current year has improved in excess of 100% over the past 60 days.

C&J Energy Services (CJ - Free Report) provides onshore well construction, well completion and support to oil and gas exploration and production companies. This Zacks Rank #3 company also offers complementary oilfield services. Texas-based C&J Services surpassed the Zacks Consensus Estimate in three of the trailing four quarters with the average beat being 3.9%.

Arrow Electronics (ARW - Free Report) is based in New York and carries a Zacks Rank #3. It is one of the largest distributors of electronic components and enterprise computing products across the globe. The expected EPS growth rate for 3-5 years is 6.9%.

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.

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.