With the majority of companies yet to report their numbers this reporting cycle, investors would like to add stocks with the potential to surpass earnings expectations. This is because it is a well-known fact that an earnings beat generally leads to stock price appreciation.
However, the million-dollar question is how to pick the potential winners? The task becomes even more difficult when one tries to select a winning portfolio without proper guidance. With a plethora of stocks flooding the market at any point of time, an investor may end up making a wrong choice while designing one’s portfolio in the absence of proper know-how.
Choice of improper stocks can adversely impact returns, thereby ruining the very objective of investing one’s hard-earned money in the highly unpredictable stock market. In a bid to avoid such a scenario, investors usually rely on guidance from proper sources.
Broker Advice – The Way Forward
In the field of investing, brokers are deemed to be experts with thorough knowledge. Brokers, irrespective of their types (sell-side, buy-side or independent), 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. Broker opinion should thus act as a valuable guide for investors while deciding their course of action (buy, sell or hold) on a particular stock.
Earnings Estimate Revisions – A Winning Pointer
Since brokers indulge in meticulous research, the question of their actions being arbitrary does not arise. The direction of the estimate revisions serves as an important pointer regarding the price of a stock. In fact, a rating upgrade normally leads to stock price appreciation and vice versa.
Given the expertise of brokers in investment matters, it is natural for investors to believe that there is a solid reason/logic behind their improving the recommendation on a particular stock. 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.
Revenues Performance Not to be Ignored
According to many market watchers, a revenue beat is more creditable for a company than a mere earnings outperformance, especially in an environment of revenue weakness due to macroeconomic headwinds like a strong dollar or lackluster demand for travel (which will hurt travel-focused companies). Therefore, one must take top-line performance into consideration as well while formulating a winning strategy. We have included in our screen the price/sales ratio which serves as a strong complementary valuation metric.
# (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:
Atlanta-based Asbury Automotive Group (ABG - Free Report) is one of the largest automotive retailers in the United States. The company primarily sells older model used vehicles and provides financing for its customers. The company has an impressive track record with respect to earnings, having surpassed the Zacks Consensus Estimate in each of the past four quarters by an average of 11.3%. The stock carries a Zacks Rank #3 (Hold). You can see the complete list of today’s Zacks #1 Rank (Strong Buy) stocks here.
Hub Group (HUBG - Free Report) , headquartered in Oak Brook, IL, provides intermodal, trucking, truck brokerage, and other logistics services. The stock, carrying a Zacks Rank #3, has witnessed a 2.1% upward revision in the Zacks Consensus Estimate for current-year earnings over the past 90 days.
Westlake, Texas-based Core-Mark Holding Company (CORE - Free Report) is one of the largest marketers of fresh and broad-line supply solutions to the convenience retail industry in North America. The stock, sporting a Zacks Rank #1, has witnessed a 2.3% upward revision in the Zacks Consensus Estimate for next-year earnings over the past 60 days.
Murphy USA (MUSA - Free Report) is a leading independent retailer of motor fuel and convenience merchandise in the United States. This Zacks Rank #3 company surpassed the Zacks Consensus Estimate in two of the past four quarters by an average of 10.8%.
AutoNation (AN - Free Report) , through its subsidiaries, operates as an automotive retailer in the United States. The company, carrying a Zacks Rank #3, also offers vehicle maintenance and repair services, vehicle parts, extended service contracts and vehicle protection products. The company has a long-term (three to five years) expected growth rate of 3.5%.
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.