The third-quarter earnings season, which is in its last leg, has so far been impressive with many companies reporting better-than-expected earnings per share. The latest Earnings Preview showed that more than 92% of the S&P 500 companies posted respective financial numbers with 72.7% beating on the bottom line.
Generally, a company’s earnings beat leads to share price appreciation. Given this highly bullish backdrop, investors would like to add some outperformers to their respective portfolios for healthy returns.
However, this task seems daunting with a plethora of companies crowding the market. Moreover, the complexities associated with the stock market make it even more difficult for individual investors to pick profitable stocks for their portfolios in absence of proper guidance.
Pay Attention to Broker Advice
The requisite guidance to design a winning portfolio comes from brokers. The opinion of brokers is highly sought after by investors as they have a clear insight into the complications of the investment world. Consequently, it makes sense for individual investors to be guided by broker advice in order to design a promising portfolio as investors generally do not have access to such detailed and well-researched information.
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 the target stock (s) price is concerned.
Estimates can move north for a number of reasons, such as favorable earnings performance, a bullish outlook, product launch or any positive macro scenario. Similarly, lackluster earnings often cause stock price depreciation. Investors tend to be led by the direction of estimate revisions and stock price while formulating their investment strategy.
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.
What About Revenues?
While we have talked about the bottom line in detail, the top line (revenue portion) cannot be ignored. Actually, according to many market watchers, a revenue beat is more creditable for a company than a mere earnings outperformance. Therefore, we have included in our screen the price/sales ratio that serves as a strong complementary valuation metric.
# (Up- Down Rating)/ Total (4 weeks) =Top #75: This gives the list of top 75 companies that 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 current 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 bottom 10% of our universe of more than 7,700 stocks with respect to this ratio.
Price greater than 5: A stock trading below $5 will not likely create significant interest for most investors.
Average Daily Volume greater than 100,000 shares over the last 20 trading days: Volume has to be substantial to ensure that these are easily traded.
Market value ($ 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 qualify the screentest:
Builders FirstSource (BLDR - Free Report) manufactures and supplies building materials, manufactured components and construction services. The Zacks Consensus Estimate for current-year earnings has moved 8.6% north in the past 30 days. The stock carries a Zacks Rank #2 (Buy). You can see the complete list of today’s Zacks #1 Rank (Strong Buy) stocks here.
Domiciled in Charlotte, NC, Sonic Automotive (SAH - Free Report) operates as an automotive retailer. Its 2019 earnings are expected to jump 43.5%. The stock, sporting a Zacks Rank #1, has witnessed 8.1% upward revision in the Zacks Consensus Estimate for current-year earnings over the past 30 days.
Clearwater Paper Corporation (CLW - Free Report) : This Spokane, WA-based company carries a Zacks Rank #3 (Hold). The company produces pulp and paperboard at multiple facilities across the United States. The Zacks Consensus Estimate for 2020 earnings has been raised in excess of 100% on a year-over-year basis.
Brentwood, TN-based Delek US Holdings (DK - Free Report) is an independent refiner, transporter and marketer of petroleum products. The company surpassed the Zacks Consensus Estimate for earnings in each of the last four quarters, the average being 77.9%. The stock carries a Zacks Rank of 3.
Boise Cascade Company (BCC - Free Report) : Headquartered in Boise, ID, this Zacks #3 Ranked company is one of the largest producers of engineered wood products and plywood in North America as well as a U.S. wholesale distributor of building products. The projected earnings per share growth rate (next three to five years) for the company currently stands at 7.9%.
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.