The sole aim of investors, while designing their portfolio, is to generate handsome returns. However, with a deluge of stocks flooding the stock market, the task is by no means an easy one. On top of that, the time constraint confronting us these days makes the task of arriving at the right stocks all the more daunting. Moreover, the stock market is not an easy place to master and one needs thorough knowledge to rake in profits.
Broker Advice: An Invaluable Guide
It is in the best interest of investors to rely on guidance provided by brokers -- who are deemed to be experts in the field. 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. Consequently, 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 Estimate Revisions: A Winning Pointer
The action of brokers is by no means arbitrary and is instead guided by sound logic. Thus, the direction of estimate revisions serves as an important pointer regarding the price of a stock.
For example, an earnings beat by a company generally leads to upward estimate revisions with prices moving north. Similarly, a stock may fall out of analysts’ favor due to adverse events like pipeline failure (for a biotech player). Trimming of earnings estimates by brokers often leads to stock price depreciation. Naturally, investors would look to get dump such stocks on the basis of broker advice.
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.
Designing a Winning Portfolio
We have designed a screener to arrive at stocks based on improving analyst recommendation and upward earnings estimate revisions over the last four weeks. However, considering only these factors does not make our strategy foolproof as the top line has not been considered.
Actually, according to many market watchers, a top-line outperformance 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 the price/sales ratio in our screener 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.
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 $5 will not likely be of significant interest to most investors.
Average Daily Volume greater than 100,000 shares over the last 20 trading days: Volume has to be significant to ensure that these are easily traded.
Market value ($ mil) = Top #3000: This gives us stocks that are in 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 Axle & Manufacturing Holdings Inc. AXL is a leading supplier of driveline and drivetrain systems, modules and components for the light vehicle market. The company has an impressive track record with respect to earnings, having surpassed the Zacks Consensus Estimate in each of the last four quarters by an average 9.2%. The automobile stock sports a Zacks Rank #1 (Strong Buy). You can see the complete list of today’s Zacks #1 Rank stocks here.
Chesterbrook, PA-based AmerisourceBergen Corporation ABC is one of the world’s largest pharmaceutical services companies, which focuses on providing drug distribution and related services to reduce health care costs and improve patient outcome. This Zacks Rank # 2 (Buy) company has an impressive history with respect to earnings. The company has reported better-than-expected earnings in each of the last four quarters, the average being 7.7%.
Basic Energy Services BAS provides a range of services to America's oil and gas producers. Its operations span the heartland of domestic onshore production from Texas, Oklahoma, Louisiana and New Mexico to the Rocky Mountain states. The company surpassed the Zacks Consensus Estimate in two of the last four quarters by an average of 4.6%. The stock carries a Zacks Rank #2.
Diplomat Pharmacy, Inc. DPLO, based in headquartered in Flint, MI, focuses on medication management programs for people suffering from complex chronic diseases. This Zacks Rank #3 (Hold) company has reported earnings beats in two of the last four quarters, the average being 7.15%.
California Resources Corporation CRC, based in Los Angeles, CA, produces, gathers, processes and markets crude oil, natural gas, natural gas liquids and electricity primarily in its home state. The Zacks Rank #3 company surpassed the Zacks Consensus Estimate in two of the last four quarters by an average 3.9%.
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 Axle & Manufacturing Holdings, Inc. (AXL): Free Stock Analysis Report
Basic Energy Services, Inc. (BAS): Free Stock Analysis Report
Diplomat Pharmacy, Inc. (DPLO): Free Stock Analysis Report
AmerisourceBergen Corporation (Holding Co) (ABC): Free Stock Analysis Report
California Resources Corporation (CRC): Free Stock Analysis Report
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