The sole aim of investors, while designing their portfolio, is to generate handsome returns. However, with a huge number of stocks flooding the market at a particular point of time, the task is anything but simple, more so in the face of time constraints.
In fact, the stock market is not an easy place to master and one needs thorough knowledge to rake in profits. This is where some guidance comes in handy. To get proper guidance, investors often fall back on expert advice while arriving at their investment decision (buy, sell or hold). The experts in the field of investing are brokers as they have at their disposal a lot more information on a company and its prospects than individual investors.
Brokers, irrespective of their types (sell-side, buy-side or independent), undertake thorough research of the stocks covered by them. They go through minute details of the publicly available financial documents apart from attending company conference calls and other presentations. Therefore, the opinion of brokers can act as a valuable guide for investors.
Earnings Estimate Revisions
Since brokers indulge in thorough research, the question of their actions being arbitrary does not arise. Estimate revisions also serve as an important pointer regarding the price of a stock. In fact, an increase in estimates normally leads to stock price appreciation and vice versa.
One of the well-accepted investment strategies is to maintain a diversified portfolio to generate handsome returns irrespective of the market conditions. For instance, in the face of extremely low oil prices, analysts adopt a bullish stance on airline stocks and consequently raise estimates. Naturally, adding such stocks to one’s portfolio in such a scenario might prove to be a winning strategy.
Similarly, analysts might turn bearish and trim estimates, thereby downgrading a stock, following adverse events like lackluster earnings or pipeline failure (for a biotech player). Naturally, investors look to get rid of such stocks from their portfolio on the basis of broker advice.
Designing a Winning Portfolio
To take care of the performance with respect to the bottom line, we have designed a screen based on improving analyst recommendation and upward estimate revisions over the last four weeks.
While we have talked about the bottom line in detail, the top line (revenue portion) cannot be ignored. The price/sales ratio has been clubbed with the above criteria as it is a strong complementary valuation metric in the presence of analyst information. 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 the 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 criterion 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 takes out the ADR and Canadian stocks.
Here are five of the 10 stocks that made it through the screen:
Delek US Holdings (DK - Free Report) is an independent refiner, transporter and marketer of petroleum products. This Zacks Rank #3 (Hold) company is based in Brentwood, TN. The company has an impressive history with respect to earnings per share. It outshined the Zacks Consensus Estimate in three of the trailing four quarters, with the average beat being 88%.
Ashford Hospitality Trust (AHT - Free Report) is based in Dallas, TX. The company is an externally-advised REIT focused on investing in the hospitality industry. Ashford sports a Zacks Rank #1 (Strong Buy). The Zacks Consensus Estimate for the current year has improved in excess of 100% over the past 60 days. You can see the complete list of today’s Zacks #1 Rank stocks here.
Headquartered in New Albany, OH, Abercrombie & Fitch Co. (ANF - Free Report) is a specialty retailer. The company surpassed the Zacks Consensus Estimate in each of the prior four quarters, the average positive earnings surprise being 88.3%. The stock sports a Zacks Rank #1.
Hibbett Sports (HIBB - Free Report) operates sporting goods stores in small to mid-sized markets in the South, Southwest, Mid-Atlantic and lower Midwest regions of the United States. The stock carries a Zacks Rank #2 (Buy). The Zacks Consensus Estimate for the current quarter has improved in 5.7% over the past 60 days.
Diebold Nixdorf, Incorporated (DBD - Free Report) is a provider of connected commerce solutions to financial institutions. This Zacks Rank #2 Ohio-based company also 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.
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.