Lack of proper guidance often leads to failure. This stands true for the investing world as well. With a deluge of stocks flooding the market at any point of time, it is quite possible for an investor to make wrong choices while designing one’s portfolio, in the absence of proper know-how. Moreover, the time constraint that we have to fast these days makes the task of making proper choices even harder. Making the wrong choices can adversely impact returns, thereby tarnishing the objective of investing in the equity market.
Brokers to the Rescue
To avoid such confusion, investors, more often than not rely on guidance provided by brokers — who are deemed to be experts in the field equipped with thorough knowledge. Brokers, irrespective of their types (sell-side, buy-side or independent) undertake thorough research of the stocks covered by them.
Toward that end, they attend company conference calls, interview management personnel, minutely study the company’s publicly available documents among other things. Given this backdrop, it is no surprise that they are armed with extensive know-how of the stocks in their portfolio(s). Consequently, it is in the best interest of investors to be guided by the “experts” in the field while arriving at investment decisions (buy, sell or hold).
Earnings Estimate Revisions – An Useful Guide
Since brokers indulge in thorough research, their actions are rational and well reasoned. The direction of the estimate revisions serve as an important pointer regarding the price of a stock. In fact, a rating upgrade normally leads to stock price appreciation and vice versa.
One of the well-accepted investment strategies is to maintain a diversified portfolio to generate handsome returns irrespective of the 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 winning strategy. Similarly, analysts might turn bearish and trim estimates, thereby downgrading a stock following adverse events like lackluster earnings or pipeline failure (for a biotech player). Naturally, investors would look to get rid of such stocks from their portfolio, on the basis of broker advice.
To take care of the earnings performance, we have designed a screen based on improving analyst recommendation and upward estimate revisions over the last four weeks.
Don’t Ignore the Top Line
However, a strategy designed solely on the basis of the bottom line is unlikely to be 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 like a strong dollar or lackluster demand for travel (which will hurt travel-focused companies). To address top-line concerns, 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: 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: 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 takes out the ADR and Canadian stocks.
Here are five of the 10 stocks that made it through the screen:
Dean Foods Company DF, based in Dallas, TX, is a leading processor and distributor of milk and other dairy products in the U.S. as well as a leading manufacturer of various specialty food products. The Zacks Consensus Estimate for earnings in 2016 is projected to increase 31.5%, higher than the industry average of 26.5%. The Zacks Consensus Estimate for 2016 has jumped 3.9% to $1.62 per share over the last month for this Zacks Rank # 1 (Strong Buy) stock. The company has a 12% expected EPS growth rate for 3–5 years. You can see the complete list of today’s Zacks #1 Rank stocks here.
Cloud Peak Energy CLD produces coal in the Powder River Basin in the U.S. The company operates through Owned and Operated Mines, and Logistics and Related Activities. This Gillette, WY-based Zacks Rank # 1 stock has an impressive history with respect to the bottom line, having reported better-than-expected earnings in three of the last four quarters with an average beat of over 100%.
Atwood Oceanics Inc. ATW is a Houston, TX-based drilling contractor. The Zacks Rank #3 (Hold) stock has an impressive history with respect to the bottom line, having reported better-than-expected earnings in each of the last four quarters with an average beat of 16.4%.
Headquartered in New York City, Avon Products Inc. AVP directly sells cosmetics, fragrances, toiletries, jewelry, and accessories. The Zacks Consensus Estimate for the current quarter has increased by a penny to 10 cents per share over the last month. Moreover, the stock price for this Zacks Rank #3 stock appreciated 40% in the last six months.
Big Five Sporting Goods BGFV, a sporting goods retailer in the western U.S., offers athletic shoes, apparel, accessories and a broad selection of outdoor and athletic equipment. This El Segundo, CA-based Zacks Rank #1 stock has an impressive history with respect to the bottom line, having reported better-than-expected earnings in three of the last four quarters with an average beat of 4.8%.
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.
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.
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