The sole aim of investors, while designing their portfolio, is to generate attractive returns. No one wants his/her hard-earned money to go down the drain. However, with a plethora of stocks flooding the stock market, the task is by no means an easy one. In fact, the process is like spotting a needle in a haystack, especially if the investor is unaided.
Choice of improper stocks can adversely impact his/her returns, thereby ruining the very objective of investing hard-earned money in the highly unpredictable stock market. To avoid such confusion, investors, more often than not, rely on guidance provided by brokers as they have a clear insight into the complexities surrounding the investment world.
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 price of stock (s) is concerned.
Moreover, the abovementioned action of brokers is by no means arbitrary and is instead guided by sound logic. Thus, the direction of estimate revisions serves as an important pointer regarding the price of a stock.
For example, an earnings beat by a company generally leads to upward estimate revisions with prices moving north. Similarly, a stock may fall out of analysts’ favor due to adverse events like pipeline failure (for a biotech company). Trimming of earnings estimates by brokers often leads to stock price depreciation. Naturally, investors would look to dump such stocks on the basis of broker advice.
To take care of the bottom-line performance, we have designed a screen based on improving analyst recommendation and upward estimate revisions over the last four weeks.
Top Line to Be Considered As Well
Designing a strategy based solely on the bottom line is unlikely to culminate in a winning strategy. Actually, 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. To take care of the top line, 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.
To ensure that the strategy is a winning one, covering all bases, we have added the following screening parameters:
Price-to-Sales = Bot%10: Lower the ratio the better, companies meeting this criteria 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 eliminates the ADR and Canadian stocks.
Here are five of the 10 stocks that made it through the screen:
American Airlines Group (AAL - Free Report) operates more than 6,700 daily flights to over 330 destinations in more than 50 nations across the globe from its hubs. American Airlines is headquartered in Fort Worth, TX and carries a Zacks Rank #3 (Hold). The Zacks Consensus Estimate for 2019 and 2020 earnings has increased 1.4% and 0.2% respectively, in the past 60 days.
AutoNation (AN - Free Report) is the largest 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 earnings growth rate of 2.3%.
Dillard's (DDS - Free Report) is a large departmental store chain featuring fashion apparel and home furnishings. The company also sells its merchandize through the Internet at www.dillards.com. The stock carries a Zacks Rank #2 (Buy). The Zacks Consensus Estimate for fiscal 2019 and fiscal 2020 earnings has increased 22.2% and 17.2% respectively, in the past 60 days. You can see the complete list of today’s Zacks #1 Rank (Strong Buy) stocks here.
Montage Resources Corporation (MR - Free Report) is an Appalachian Basin-focused oil and gas explorer. This TX-headquartered company – carrying a Zacks Rank #3 – has seen the Zacks Consensus Estimate for current-year earnings being revised upward to the tune of 8.6% over the past 30 days.
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 Zacks Consensus Estimate for current-quarter earnings is projected to increase in excess of 100% year over year.
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.