Faltering in the absence of proper guidance is not an unusual occurrence in life. The same is true for participants in the investing world. One of the tried and tested strategies is to maintain a well-diversified portfolio (i.e. including stocks from different industries) so that one rakes in solid returns irrespective of market conditions. However, it is easier said than done.
With multiple stocks flooding the market from every possible corner at any point of time, selecting appropriate stocks without guidance from people with proper knowhow about the market is difficult.
Why Pay Heed to Such Advice?
The experts in the field of investing are brokers. Brokers, irrespective of their types (sell-side, buy-side or independent), carry out 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.
Movement of Earnings Estimates: An Invaluable 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 a particular company. In fact, a rating upgrade or downgrade by brokers has the potential to immediately influence the price of the stock.
Given the expertise of brokers in investment matters, it is natural for investors to believe that there is a solid reason/logic behind brokers improving their recommendation on a particular stock. In fact, a rating upgrade generally leads to stock price appreciation and vice versa. Estimates can move north for a number of reasons – favorable earnings performance, a bullish guidance, product launch or any favorable macro scenario.
Here we have designed a screen based on improving analyst recommendation and upward estimate revisions over the last four weeks.
Ignore the Top Line at Your Own Peril
To design a winning strategy, it is not prudent to consider only the bottom line. In fact, according to some market watchers, a top-line outperformance is more creditable for a stock than a mere earnings beat, under some circumstances. Therefore, to make our strategy full-proof, we have taken into account top-line performance. We have considered price/sales ratio, which serves as a strong complementary valuation metric, for screening stocks.
# (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:
Calpine Corporation CPN is a major U.S. power company that owns, leases and operates low-carbon, natural gas-fired and renewable geothermal power plants. Calpine has an earnings growth expectation of 18.6% over the next three to five years. The stock carries a Zacks Rank #3 (Hold).
Celadon Group CGI, based in Indianapolis, IN,offers transportation services in countries including the U.S., Canada and Mexico. The Zacks Consensus Estimate for the third quarter of fiscal 2017 increased by a cent to 3 cents per share over the last month for this Zacks Rank# 2 (Buy) stock. You can see the complete list of today’s Zacks #1 Rank (Strong Buy) stocks here.
Based in Franklin, TN, Community Health Systems, Inc. CYH owned or leased 155 hospitals included in continuing operations, with an aggregate of 26,222 licensed beds. These included 152 general acute care hospitals and three stand-alone rehabilitation or psychiatric hospitals as of Dec 31, 2016. The company delivered a massive positive earnings surprise in excess of 100% in the fourth quarter of 2016. The stock carries a Zacks Rank #3.
Based in Los Angeles, AECOM Technology Corporation ACM is a leading solutions provider for supporting professional, technical and management solutions for diverse industries across end markets like transportation, facilities, government as well as those in environmental, energy and water businesses. The Zacks Consensus Estimate for fiscal 2017 has increased by a cent over the last seven days to $2.96 per share for this Zacks Rank #3 stock.
Headquartered in San Francisco, ABM Industries Inc. ABM provides engineering, janitorial, parking, and facility solutions to commercial, industrial, institutional, and retail facilities. The company, carrying a Zacks Rank # 2, has an impressive track record with respect to earnings, having surpassed the Zacks Consensus Estimate in three of the last four quarters by an average of 16.1%.
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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Celadon Group, Inc. (CGI): Free Stock Analysis Report
Calpine Corporation (CPN): Free Stock Analysis Report
ABM Industries Incorporated (ABM): Free Stock Analysis Report
AECOM (ACM): Free Stock Analysis Report
Community Health Systems, Inc. (CYH): Free Stock Analysis Report
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