With the Q3 earnings season approaching, investors would look to add stocks to their respective portfolios, which have the potential to surpass earnings expectations in the to-be-reported quarter. This is because an earnings beat generally leads to stock price appreciation.
Investors after all, while shelling out their hard-earned money in the stock market, are governed by the sole objective of generating handsome returns on their portfolio. However, the task of designing one’s portfolio with potential outperformers is not an easy one. In fact, equity market tricks are not easy to master with a plethora of stocks flooding the space at any point of time. The task becomes even more difficult when one tries to select a winning portfolio without proper guidance.
Time for Some Broker Advice?
In view of the aforementioned constraints, it is in the best interest of investors to be guided by the experts in the field. The concerned experts are brokers. Brokers, irrespective of their types (sell-side, buy-side or independent), undertake thorough research of the stocks covered by them.
They have at their disposal a lot more information on a company and its prospects than individual investors. To attain their objective, they go through minute details of the publicly available financial documents apart from attending company conference calls and other presentations. Broker opinion should thus act as a valuable guide for investors while deciding their course of action (buy, sell or hold) on a particular stock.
Direction of Earnings Estimates Serves as a Proper Guide
Since brokers meticulously follow the stocks in their coverage, they revise their earnings estimates after carefully examining the pros and cons of an event for the concerned company. Naturally, their estimate revisions serve as an important pointer regarding the price of a stock.
For example, an earnings outperformance by a company generally leads to upward estimate revisions with prices moving north. Similarly, lackluster earnings often lead to stock price depreciation. Investors tend to be guided by the direction of estimate revisions and stock price while formulating their investment strategy.
To take care of the earnings performance, we have designed a screen based on improving broker recommendation and upward estimate revisions over the last four weeks.
Do Not Ignore the Top Line
Designing a strategy based solely on the bottom line is unlikely to result in a winning approach. 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. 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 eliminates the ADR and Canadian stocks.
Here are five of the 10 stocks that made it through the screen:
American Airlines Group AAL operates more than 6,700 daily flights to over 330 destinations in more than 50 nations across the globe from its hubs. American Airlines is headquartered in Fort Worth, TX and carries a Zacks Rank #3 (Hold). The company has an impressive track with respect to earnings, having surpassed the Zacks Consensus Estimate in each of the past four quarters by an average of 1.9%.
Beazer Homes USA BZH, based in Atlanta, GA sports a Zacks Rank #1 (Strong Buy). This homebuilder’s expected earnings growth rate for the next quarter is 23.1% against its industry’s projected decline of 15.5%. You can see the complete list of today’s Zacks #1 Rank stocks here.
Atlanta-based Asbury Automotive Group ABG is one of the largest automotive retailers in the United States.The company primarily sells older model used vehicles and provides financing for its customers. The Zacks Consensus Estimate for its current-year earnings has increased 0.5% in the past 60 days. The stock carries a Zacks Rank #2.
Leawood, KS-based AMC Entertainment Holdings AMC operates as a theatrical exhibition company, primarily in the United States. The stock currently has a Zacks Rank #3. The company’s expected earnings growth rate for the current quarter is 58.1% against its industry’s projected decline of 38.4%.
Beacon Roofing Supply BECN is the largest distributor of residential and non-residential roofing materials in the United States and Canada. The company’s expected earnings growth rate for the current quarter is 14% compared with its industry’s projected growth of 9.1%. The stock carries a Zacks Rank #3.
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.
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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.
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American Airlines Group Inc. (AAL) : Free Stock Analysis Report
Asbury Automotive Group, Inc. (ABG) : Free Stock Analysis Report
Beacon Roofing Supply, Inc. (BECN) : Free Stock Analysis Report
Beazer Homes USA, Inc. (BZH) : Free Stock Analysis Report
AMC Entertainment Holdings, Inc. (AMC) : Free Stock Analysis Report
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