5 Stocks to Bet on Following Recent Broker Rating Upgrades
We are at the tail end of the Q4 earnings season with the majority of the companies having already unveiled their quarterly financial numbers. The picture that has emerged so far is an extremely healthy one. The earnings season remains on track to end on a strong note, displaying substantial growth. A high proportion of companies have reported better-than-expected earnings per share in the current reporting cycle.
Generally, an earnings beat leads to stock price appreciation. In such a highly bullish scenario, investors tend to add outperformers to their respective portfolios for healthy returns.
However, with a deluge of earnings reports flooding the market during the reporting cycle, pinpointing outperformers is by no means an easy task for individual investors. In the absence of proper guidance, identifying a winning stock is akin to searching for ‘a needle in a haystack’, for an investor. The proper guidance, in this respect, comes from brokers, who are deemed to be experts, equipped with vast knowledge and know how as far the field of investing is concerned.
Of the three types of brokers/analysts (sell-side, buy-side and independent) present in the investment world, sell-side analysts are most common. Various brokerage firms employ them to provide unbiased opinion to investors after thorough research. Buy-side analysts are employed by hedge funds, mutual funds etc. while the independent ones simply sell their reports to investors.
Why Such Advice is Invaluable
Brokers, irrespective of their types, 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. Consequently, the opinion of brokers should act as a valuable guide for investors while deciding their course of action (buy, sell or hold) on a particular stock.
Earnings Estimates Revisions: A Key Pointer
Since brokers follow the stocks in their coverage minutely, they revise their earnings estimates after carefully examining the pros and cons of an event for the concerned company. In fact, a rating upgrade or downgrade by brokers has the potential to immediately influence the price of the stock.
Since brokers arrive at their recommendation on a stock after thoroughly analyzing the nitty-gritty associated with the company, it is natural that if investors see them improving their recommendation on a particular stock, they are inclined to believe that there is a solid reason/logic behind it. In fact, a rating upgrade generally leads to stock price appreciation. Similarly, the price of a stock may plummet following a rating downgrade.
Estimates can move north for a number of reasons – favorable earnings performance, a bullish guidance, product launch or a favorable macro scenario.
Making the Most of Broker Opinions
The above write-up clearly suggests that by following broker actions, one can arrive at a winning portfolio of stocks. Keeping this in mind, we have designed a screen to shortlist stocks based on improving analyst recommendation and upward revisions to earnings estimates over the last four weeks. Also, since the price/sales ratio is a strong complementary valuation metric in the presence of analyst information, it has been included. The price/sales ratio takes care of the company’s top line, making the strategy foolproof.
Screening Criteria
# (Up- Down Rating)/ Total (4 weeks) =Top #75: This gives the list of top 75 companies that have witnessed net upgrades over the last four 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 four 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 the 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:
Centene Corporation CNC: It is a diversified, multi-national healthcare enterprise that provides a portfolio of services to government sponsored and commercial healthcare programs, focusing on under-insured and uninsured individuals. This Zacks Rank #1 (Strong Buy) company has an impressive earnings track record, having surpassed expectations in each of the last four quarters with an average surprise of 9.8%. You can see the complete list of today’s Zacks #1 Rank stocks here.
The Andersons, Inc. ANDE: This Maumee, OH, based company is a diversified company operating six different business segments, ranging from buying, selling and storing grain to leasing railcars and running retail stores catering to the latest home hardware needs. This Zacks Rank #1 stock has witnessed the Zacks Consensus Estimate for current-year earnings being revised 9.8% upward over the last seven days.
Builders FirstSource, Inc. BLDR manufactures and supplies building materials, manufactured components, and construction services to professional contractors, sub-contractors, and consumers in the United States. This Zacks Rank #2 (Buy) stock has witnessed the Zacks Consensus Estimate for current-quarter earnings being revised 21.4% upward over the last 30 days.
United Continental Holdings, Inc. UAL, based in Chicago, transports people and cargo through its mainline and regional operations. It is responsible for operating more than 4,500 flights to 338 airports across five continents on a daily basis. This Zacks Rank #2 stock has seen the Zacks Consensus Estimate for current-year earnings being revised 2.5% upward over the last 30 days.
Dillard’s, Inc. DDS operates as a fashion apparel, cosmetics and home furnishing retailer in the United States. This Zacks Rank #1 stock has seen the Zacks Consensus Estimate for current-year earnings being revised 3.8% upward over the last 30 days.
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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United Continental Holdings, Inc. (UAL) : Free Stock Analysis Report
Builders FirstSource, Inc. (BLDR) : Free Stock Analysis Report
Centene Corporation (CNC) : Free Stock Analysis Report
Dillard's, Inc. (DDS) : Free Stock Analysis Report
The Andersons, Inc. (ANDE) : Free Stock Analysis Report
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