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Use Relative Price Strength to Survive the Coronavirus Hysteria

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The fast-spreading novel coronavirus outbreak has triggered an unprecedented sell-off in equities and bonds. Stocks are being clobbered, major indices are crashing regularly, while oil has plunged to lowest levels in 18 years. Global efforts to combat the pandemic’s impact and rev up economic activity have largely failed so far.   

Amid all the coronavirus-induced lockdown, panic and isolation, there are still certain stocks built to survive the crisis. One of the ways such potential plays could be identified is to look for signs of relative price strength.

Relative Price Strength Strategy

Whether a stock has the potential to offer considerable returns is determined primarily by its earnings and valuation ratios. Simultaneously, it is important to check whether its price performance exceeds its peers or the industry average.

Upon such comparison, if we find that a stock is unable to match up to wider sectoral growth despite having impressive earnings momentum or valuation multiples, it may be better to avoid it.

However, those outperforming their respective industries or benchmarks should be included in your portfolio, since they have a higher chance of securing significant returns. Picking a stock that outperforms its peers ensures that you have a winning option on your hands.

Then again, it is imperative that you determine whether or not an investment has relevant upside potential when considering stocks with significant relative price strength. Stocks delivering better than the S&P 500 over a period of 1 to 3 months at the least and having solid fundamentals indicate room for growth and are the best ways to go about this strategy.

Finally, it is important to find out whether analysts are optimistic about the upcoming earnings results of these companies. In order to do this, we have added positive estimate revisions for the current quarter’s (Q1) earnings to our screen. When a stock undergoes an upward revision, it leads to additional price gains.

Screening Parameters

Relative % Price change – 12 weeks greater than 0

Relative % Price change – 4 weeks greater than 0

Relative % Price change – 1 week greater than 0

(We have considered those stocks that have been outperforming the S&P 500 over the last 12 weeks, four weeks and one week.)

% Change (Q1) Est. over 4 Weeks greater than 0:Positive current quarter estimate revisions over the last four weeks.

Zacks Rank equal to 1:Only Zacks Rank #1 (Strong Buy) stocks – that have returned more than 26% annually over the last 26 years and surpassed the S&P 500 in 23 of the last 26 years – can get through. You can see the complete list of today’s Zacks #1 Rank (Strong Buy) stocks here.

Current Price greater than or equal to $5 and Average 20-day Volume greater than or equal to 50,000:A minimum price of $5 is a good standard to screen low-priced stocks, while a high trading volume would imply adequate liquidity.

VGM Score less than or equal to B:Our research shows that stocks with a VGM Score of A or B when combined with a Zacks Rank #1 or #2 (Buy) offer the best upside potential.

Here are the five stocks that made it through the screen:

ITOCHU Corporation (ITOCY - Free Report) : ITOCHU is a diversified trading house. The FY 2020 Zacks Consensus Estimate for this Tokyo-headquartered company is $6.14, indicating 5.1% earnings per share growth over FY 2019. Next fiscal year’s average forecast is $6.28 pointing to another 2.3% growth. ITOCHU has a VGM Score of A.

América Móvil (AMX - Free Report) : Latin America’s largest wireless company with more than 362 million subscribers across 25 countries, América Móvil has a VGM Score of A. Over the past 60 days, the Mexico-based company has seen the Zacks Consensus Estimate for 2020 increase 5.1% to $1.24 per share.

Donegal Group Inc. (DGICA - Free Report) : Headquartered in Marietta, PA, Donegal Group is a regional property-casualty insurance holding company with business in Mid-Atlantic and Southern states. The firm has a VGM Score of B and a solid earnings surprise history having surpassed estimates in each of the last four quarters, the average being 271.1%.

DaVita Inc. (DVA - Free Report) : DaVita is a leading provider of dialysis services in the United States. Sporting a VGM Score of B, this Denver, CO-headquartered company’s expected EPS growth rate for three to five years currently stands at 20.4%, comparing favorably with the industry's growth rate of 13.2%.

The Cardinal Health (CAH - Free Report) : Founded in 1971 and headquartered in Dublin, OH, Cardinal Health is a nation-wide drug distributor and provider of services to pharmacies, healthcare providers and manufacturers. The company has a VGM Score of A and an enviable earnings surprise history having surpassed estimates in each of the last four quarters. Earnings surprise was 18.2%, on average.

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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.