With the Q2 earnings season in nascent stage, investors would like to add stocks with the potential to surpass earnings expectations to their respective portfolio. This is because an earnings beat generally leads to stock price appreciation.
However, the task of designing one’s portfolio with potential outperformers is anything but an easy one. The task becomes even more difficult when one tries to select a winning portfolio without proper guidance.
It is often observed that one falters in life owing to lack of proper guidance. This is applicable to the investing world as well. With a plethora of stocks flooding the market at any point of time, it is highly possible for an investor to make a wrong choice while designing one’s portfolio, in the absence of proper know-how or expertise. Moreover, the time constraint that we all have to confront these days makes the task of making proper choices harder.
Choice of improper stocks can adversely impact returns, thereby ruining the very objective of investing one’s hard-earned money in the highly unpredictable stock market. In a bid to avoid such a scenario, investors usually rely on guidance from proper sources.
Broker Advice – The Way Forward
In the field of investing, brokers are deemed to be experts with thorough knowledge. Brokers, irrespective of their types (sell-side, buy-side or independent), 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.
Earnings Estimate Revisions – A Winning Pointer
Since brokers indulge in meticulous research, the question of their actions being arbitrary does not arise. The direction of the estimate revisions serves as an important pointer regarding the price of a stock. In fact, a rating upgrade normally leads to stock price appreciation and vice versa.
Given the expertise of brokers in investment matters, it is natural for investors to believe that there is a solid reason/logic behind their improving the recommendation on a particular stock. Estimates can move north for a number of reasons — favorable earnings performance, a bullish guidance, product launch or any favorable macro scenario.
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.
Revenues Performance Not to be Ignored
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). Therefore, one must take the top-line performance into consideration as well while formulating a winning strategy. 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:
Denver, CO-based Antero Resources Corporation AR is an independent explorer, primarily engaged in the acquisition and development of natural gas, natural gas liquids and oil resources in the Appalachian Basin. The company carries a Zacks Rank #2 (Buy). The Zacks Consensus Estimate for current-year earnings improved 17.7% over the last 60 days. You can see the complete list of today’s Zacks #1 Rank (Strong Buy) stocks here.
Headquartered in Parsippany, N.J., Avis Budget Group CAR operates as a leading vehicle rental operator in North America, Europe and Australasia with an average rental fleet of nearly 650,000 vehicles. The company, sporting a Zacks Rank #1,has an impressive track with respect to earnings per share, having outshined the Zacks Consensus Estimate in three of the trailing four quarters. The average beat is 23.2%.
NOW Inc. DNOW is based in Houston, TX. This Zacks Rank #3 company is one of the leading distributors to energy and industrial markets globally. The Zacks Consensus Estimate for current-year earnings improved 4.8% over the past 60 days.
Headquartered in Dublin, OH, Cardinal Health CAH is a nation-wide drug distributor and provider of services to pharmacies, healthcare providers and manufacturers. The company, carrying a Zacks Rank #3,has an impressive track with respect to earnings per share, having outshined the Zacks Consensus Estimate in each of the trailing four quarters. The average beat is 15%.
Atlanta-based Asbury Automotive Group ABG is one of the largest automotive retailers in the United States. This Zacks Rank #3 (Hold) company owns and operates over 90 automobile retailers across 10 states. The company’s expected EPS growth rate for three to five years currently stands at 14.3%, comparing favorably with the industry's growth rate of 8.8%.
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.
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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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Avis Budget Group, Inc. (CAR) : Free Stock Analysis Report
Asbury Automotive Group, Inc. (ABG) : Free Stock Analysis Report
NOW Inc. (DNOW) : Free Stock Analysis Report
Antero Resources Corporation (AR) : Free Stock Analysis Report
Cardinal Health, Inc. (CAH) : Free Stock Analysis Report
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