Markets are in continual distress due to the rapid spread of the dreaded coronavirus (COVID-19). The uncertainty is further highlighted by the fact that the Cboe Volatility Index, referred to as Wall Street’s fear gauge, so far this year is on pace for a 280% jump, way above the 108% surge recorded during the financial crisis of 2008.
Broker Advice: The Way Forward
In view of the prevalent impasse, the task of designing a portfolio of stocks for lucrative returns is invariably daunting. Furthermore, with a plethora of stocks present in the market at any point of time, spotting potential outperformers is tough for individual investors. In absence of a proper guidance, identifying a sturdy stock is akin to searching for ‘a needle in a haystack’.
Given this backdrop, it is in the best interest of investors to seek guidance from “experts in the field." The concerned experts are brokers who have a deeper insight into what’s happening in a particular company along with their better understanding of the overall sector and the industry.
To attain their objective, they go through minute details of the publicly available financial documents apart from attending company conference calls and other presentations.
Estimate revisions serve as an important pointer regarding the price of a stock. In fact, a rating upgrade generally leads to stock price appreciation. Similarly, the price of a stock may plummet following a rating downgrade.
Estimates can move north for a number of reasons like favorable earnings performance, a bullish guidance, product launch or any positive macro scenario. To take care of the earnings results, we designed a screen based on improving analyst recommendation and northward estimate revisions over the last four weeks.
Making the Most of Broker Opinions
The above write-up clearly suggests that by following broker actions, one can arrive at a winning portfolio of stocks. Keeping this in mind, we devised a screen to shortlist stocks based on improving analyst recommendation and upward revisions of earnings estimates over the last four weeks. Also, since the price/sales ratio is a strong complementary valuation metric in the presence of analyst information, it is 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:
Avis Budget Group (CAR - Free Report) carries a Zacks Rank #3 (Hold) and is based in Parsippany, N.J. The company operates as a leading vehicle rental operator in North America, Europe and Australasia with average rental fleet of nearly 650,000 vehicles. The Zacks Consensus Estimate for current-quarter earnings has increased 4% in the past 60 days.
AmerisourceBergen Corporation (ABC - Free Report) , known for distributing pharmaceutical products, has a Zacks Rank #2 (Buy). The Zacks Consensus Estimate for current-quarter earnings has inched up 2.9% in the past 60 days. You can see the complete list of today’s Zacks #1 Rank (Strong Buy) stocks here.
Archer-Daniels-Midland Company (ADM - Free Report) , carrying a Zacks Rank #3 (Hold), is one of the leading producers of food and beverage ingredients as well as goods made from various agricultural products. The company’s expected earnings growth rate for 2020 is 2.2% against its industry’s projected decline of 5.2%.
DXC Technology Company (DXC - Free Report) offers a broad array of professional services to clients in the global, commercial and government markets. This Zacks #3 Ranked company has a trailing four-quarter positive earnings surprise of4.8%, on average. The carrier reported lower-than-expected earnings per share in one of the last four quarters, beating the Zacks Consensus Estimate in the other three.
Dillard's (DDS - Free Report) is a large departmental store chain featuring fashion apparel and home furnishings. The stock carries a Zacks Rank of 3. The Zacks Consensus Estimate for current-quarter earnings has been raised 4.5% in the past 60 days.
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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