Back to top

Image: Bigstock

5 Stocks With Relative Price Strength to Enhance Your Returns

Read MoreHide Full Article

The novel coronavirus outbreak triggered an unprecedented sell-off in equities and bonds. Stocks were clobbered, major indices crashed regularly, while in a bizarre turn of events U.S. oil futures hit negative territory.

However, over the past few months, markets, securities and crude have rebounded off their pandemic lows. Restrictions have been loosened and the economy reopened, with activity limping back toward normalcy. Meanwhile, certain drug candidates and treatments offer a ray of hope in the coronavirus fight.  

While the heaviest losses may be in the rear view mirror, the road to recovery remains long and uncertain amid concerns about a second wave of the virus. As several U.S. states experience a spike in new coronavirus infections and hospitalization, there are apprehensions that there could be another lockdown with many businesses forced to close again just after reopening. Moreover, efforts to combat the pandemic and policy initiatives to rev up economic activity have only had limited impact so far.

Amid the entire coronavirus-induced mayhem, there are few stocks that held up to the crisis even as the virus knocked down businesses and industries. With the market expected to remain volatile over the near-to-medium term, one of the ways such potential plays could be identified is to look for signs of relative price strength.

The Relative Price Strength Approach

Investors generally gauge a stock’s potential returns by examining earnings growth and valuation multiples. At the same time, it’s important to measure the performance of such a stock relative to its industry or peers, or the appropriate benchmark.

If you see that a stock is underperforming on fundamental factors, then it would be prudent to move on and find a better alternative. However, those outperforming their respective sectors in terms of price should be selected because they stand a better chance to provide considerable returns.

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 five of the 11 stocks that made it through the screen:

Sprouts Farmers Market, Inc. (SFM - Free Report) : Sprouts Farmers Market is a grocery store operator. The 2020 Zacks Consensus Estimate for this Phoenix, AZ-based company indicates 35.2% earnings per share growth over 2019. Sprouts Farmers Market has a VGM Score of A.

Patterson Companies, Inc. (PDCO - Free Report) : A leading distributor of dental and animal health products, Patterson Companies has a VGM Score of A. Over 30 days, the Saint Paul, MN-based company has seen the Zacks Consensus Estimate for fiscal 2021 increase 18.4%.

Sleep Number Corporation (SNBR - Free Report) : Sleep Number, headquartered in Minneapolis, MN, operates in the mattress industry. The firm has a VGM Score of A and an excellent earnings surprise history, having surpassed estimates in each of the last four quarters by 92.7%, on average.

T-Mobile US, Inc. (TMUS - Free Report) : T-Mobile US is a national wireless service provider. Sporting a VGM Score of B, this Bellevue, WA-headquartered company’s expected EPS growth rate for three to five years currently stands at 18.9%, comparing favorably with the industry's growth rate of 10.6%.

Quest Diagnostics (DGX - Free Report) : Founded in 1967 and headquartered in Secaucus, NJ, Quest Diagnostics is one of the largest providers of commercial laboratory services in North America. The company has a VGM Score of B and a good earnings surprise history, having surpassed estimates in each of the last four quarters. Earnings surprise was 5.6%, on average.

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.