The Q4 earnings season is in its nascent stage with 44 S&P 500 participants having reported results according to our latest
earnings outlook. The season had a bright start courtesy of earnings beats from big players like JPMorgan Chase & Co. JPM and Delta Air Lines DAL.
Investors will be hoping that the momentum continues throughout the earnings season and a high proportion of companies report better-than-expected numbers. This is because, generally, an earnings beat by a company leads to an uptick in its stock price. Given this backdrop, investors will like to add outperformers to their respective portfolios for healthy returns.
Nonetheless, the task is far from easy with a plethora of companies present in the market. Apart from this, the complexities related to the stock market make it even more difficult for individual investors to select outperformers in their portfolios without proper guidance.
Broker Advice to the Rescue
The requisite guidance to design a winning portfolio comes from brokers. Brokers have a better understanding of stocks, deeper knowledge of the industry and grasp over the broader economy. They scrutinize a company’s fundamentals and place those against the prevalent economic scenario to find out how attractive or otherwise a stock is as an investment option.
Since brokers arrive at their recommendations (buy, sell or hold) for a stock after thoroughly analyzing the nitty-gritties associated with the company, it is advisable for investors to follow the estimate revision directions while deciding their course of action on a particular stock. The estimate revisions serve as an important pointer regarding the price of a stock. Estimates can move north for a number of reasons — favorable earnings performance, a bullish guidance, product launch or any favorable macro scenario.
One of the well-accepted investment strategies is to maintain a diversified portfolio to generate handsome returns irrespective of market conditions. For instance, in the face of extremely low oil prices, analysts adopt a bullish stance on airline stocks and consequently raise estimates. Naturally, adding such stocks to one’s portfolio in such a scenario might prove to be a bullish strategy.
Formulating a Winning Portfolio
We have designed a screener to arrive at stocks based on improving analyst recommendations and upward earnings estimate revisions over the last four weeks. However, considering only these factors does not make our strategy foolproof as the top line has not been considered.
Actually, according to many market watchers, a top-line outperformance is more creditable for a company than a mere earnings outperformance. To address top-line concerns, we have included the price/sales ratio in our screener, which serves as a strong complementary valuation metric.
Screening Criteria # (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:
ArcBest Corporation ARCB, based in Fort Smith, AR, provides freight transportation services and solutions. This Zacks Rank #3 (Hold) stock has seen the Zacks Consensus Estimate for 2020 earnings being revised upward to the tune of 2% over the past 30 days. You can see . the complete list of today’s Zacks #1 Rank (Strong Buy) stocks here American Airlines AAL, headquartered in Fort Worth, TX, operates more than 6,700 daily flights to more than 330 destinations in more than 50 nations from its hubs. This Zacks Rank #3 company has an expected earnings per share growth rate (next 3-5 years) of 3.5%. AmerisourceBergen ABC is based in Chesterbrook, PA. The Zacks Rank #3 pharmaceutical services company focuses on providing drug distribution and related services to reduce health-care costs, and improve patient outcomes. The company has an impressive history with respect to earnings surprises, having outpaced the Zacks Consensus Estimate in each of the trailing four quarters. The average positive surprise is 6.5%.
Headquartered in Mechanicsville, VA,
Owens & Minor ( OMI Quick Quote OMI - Free Report) operates as a healthcare solutions company. This Zacks Rank #2 (Buy) stock’s Zacks Consensus Estimate for the ongoing-year earnings moved 1.4% north over the past 30 days. Moreover, the company reported better-than-expected earnings per share in each of the last two reported quarters.
Irving, TX- based
Commercial Metals Company CMC manufactures, recycles and markets steel and metal products, related materials and services. Commercial Metals’ estimated earnings growth rate for the current year is 17.3%, as against its industry's projected loss of 33%.
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.
Click here to sign up for a free trial to the Research Wizard today 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 .