The Q2 earnings season is in full swing. Despite headwinds like the Sino–U.S. trade tensions, the current reporting cycle has seen a healthy proportion of companies reporting better-than-expected earnings.
Generally, an earnings beat by a company leads to appreciation in its stock price. Given this backdrop, investors would 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 makes it even more difficult for individual investors to select outperformers in their portfolios in the absence of proper guidance.
Broker Advice - An Invaluable Guide
The requisite guidance to design a winning portfolio comes from brokers. Brokers invest a lot of time in researching stocks under their coverage. Such investment specialists attend conference calls, company presentations and also interact with management.
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. Therefore, it is prudent for investors to pay heed to broker advice in order to design a winning portfolio
Out of the three types of brokers (sell-side, buy-side and independent), 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.
Making the Most of Broker Opinions
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 earnings 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 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:
Headquartered in Dublin, OH, Cardinal Health (CAH - Free Report) is a nation-wide drug distributor and provider of services to pharmacies, healthcare providers and manufacturers. The company, carrying a Zacks Rank #3 (Hold), has an impressive track with respect to earnings per share, having outshined the Zacks Consensus Estimate in each of the trailing four quarters. The average beat is 15%.
Builders FirstSource (BLDR - Free Report) is a leading supplier and manufacturer of structural and related building products for residential new construction in the United States. This Zacks Rank #1 (Strong Buy) stock has seen the Zacks Consensus Estimate for current-year earnings being revised upward to the tune of 3.3% over the past 60 days. You can see the complete list of today’s Zacks #1 Rank stocks here.
AmerisourceBergen Corporation (ABC - Free Report) , based in Chesterbrook, PA, is one of the world’s largest pharmaceutical services companies. The company focuses on providing drug distribution and related services in a bid to reduce health care costs and improve patient outcomes. This Zacks Rank #3 stock has an expected earnings per share growth rate of 7.7% for three to five years.
AutoNation (AN - Free Report) , through its subsidiaries, operates as an automotive retailer in the United States. The company also offers vehicle maintenance and repair services, vehicle parts, extended service contracts and vehicle protection products. This Zacks Rank #2 (Buy) stock has seen the Zacks Consensus Estimate for current-year earnings being revised upward to the tune of 1.8% over the past 60 days.
Party City Holdco (PRTY - Free Report) : This Zacks Rank #3 company’s activities include designing, manufacturing and distributing party goods like paper and plastic tableware. The company, based in Elmsford, NY, has an expected earnings per share growth rate (three to five years) of 14.9% that compares favorably with the industry’s comparable figure of 9.9%.
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.
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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.