Markets have been rattled by escalating trade war tensions between the world’s two biggest economies — United States and China. The uncertainty is further highlighted by the fact that the Cboe Volatility Index (VIX), referred to as Wall Street’s fear gauge, is moving up and is on track for its biggest monthly gain.
Trade wars are certainly not good for the economy and squeeze corporate profit margins. This ongoing trade tension is weighing on investors’ risk appetite. Apart from trade war related tensions, modest results in the first-quarter earnings season also do not bode well for investors.
Broker Advice – The Way Forward in this Scenario
In view of the prevalent uncertainty, the task of building a portfolio of stocks for handsome returns is by no means an easy task. Furthermore, with a huge number of stocks present in the market at any point of time, spotting potential outperformers is tough for individual investors. In the absence of proper guidance, identifying a winning stock is akin to searching for ‘a needle in a haystack’.
Given this backdrop, it is in the best interest of investors to seek guidance from “experts in the field." The concerned experts are brokers. Brokers have a deeper insight into what’s happening in a particular company along with better understanding of the overall sector and the industry.
To attain their objective, they go through minute details of the publicly available financial documents apart from attending company conference calls and other presentations. Since brokers arrive at their recommendation (buy, sell or hold) on a stock after thoroughly analyzing the nitty-gritties associated with the company, it is natural for investors to be guided by the direction of estimate revisions while deciding their course of action on a particular stock.
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.
Making the Most of Broker Guidance
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 in 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 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).
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:
Avis Budget Group (CAR - Free Report) carrying a Zacks Rank #3 (Hold) is based inNew Jersey. The company 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. The Zacks Consensus Estimate for current-quarter earnings has increased 37.3% in the past 60 days. You can see the complete list of today’s Zacks #1 Rank (Strong Buy) stocks here.
Los Angeles, CA-based California Resources Corporation (CRC - Free Report) is one of the largest upstream companies in California.This Zacks Rank #3 stock has seen the Zacks Consensus Estimate for current-quarter earnings being revised upward in excess of 100% over the past 60 days.
Brinker International (EAT - Free Report) owns, develops, operates, and franchises casual dining restaurants.The stock carries a Zacks Rank #3. The company, based in Dallas, TX, has outshined the Zacks Consensus Estimate in two of the trailing four quarters. The average positive surprise is 4%.
Endologix (ELGX - Free Report) , carrying a Zacks Rank #2 (Buy), develops and markets medical devices for the treatment of abdominal aortic aneurysms in the United States and internationally.The company has an impressive earnings track record, having surpassed expectations in each of the trailing four quarters with the average positive surprise being 40.9%.
Brookdale Senior Living (BKD - Free Report) is an owner and operator of senior living facilities throughout the United States. The stock carries a Zacks Rank #2. The company’s earnings per share are expected to grow 13% (next three to five years), which compares favorably with its industry’s growth rate of 12.2%.
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.