The Q3 earnings season has unveiled a rosy picture so far with many companies reporting better-than-expected earnings per share. According to the latest Earnings Preview, more than 71% of S&P 500 companies reported their financial numbers with 74.5% of them beating estimates on the bottom-line front.
Investors like to add outperformers as they strive to design a portfolio of stocks that will fetch them handsome returns.
However, the task is by no means an easy one This is because the investing world is fraught with uncertainties and stock prices are sensitive to recent developments. The same group of stocks may not work under all circumstances.
For example, airline stocks may benefit from declining oil prices but may fall out of favor in the event of oil prices moving up. One of the well-accepted strategies to brave market uncertainties is to maintain a well-diversified (i.e. include stocks from different industries) portfolio.
Furthermore, with a plethora of stocks available in the market at any point of time, spotting potential outperformers is by no means an easy task for individual investors. In the absence of proper guidance, to identify a winning stock is akin to searching for ‘a needle in a haystack’ for an investor. Additionally, with time at a premium these days, it is next to impossible for investors to go through the extensive process. Given this backdrop, it is in the best interest of investors to seek guidance from “experts in the field”. The concerned experts are brokers.
Why You Should Pay Heed to Broker Advice
The opinion of brokers acts as a valuable guide for investors while deciding their course of action (buy, sell or hold) on a particular stock. They have a lot more information on a company and its prospects than individual investors as they not only scrutinize the publicly available financial documents but also attend company conference calls and other presentations.
Given their expertise, it is prudent for investors to pay heed to broker advice while formulating their investment strategy. Of the three types of brokers/analysts (sell-side, buy-side and independent), 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.
Moreover, broker ratings are backed by sound logic. The estimate revisions serve as an important pointer regarding the price of a stock. In fact, a rating upgrade normally leads to stock price appreciation and vice versa.
Framing a Winning Strategy
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.
# (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:
Builders FirstSource BLDR manufactures and supplies building materials, manufactured components, and construction services. The Zacks Consensus Estimate for its current-year earnings has moved up 5.1% in the past 90 days. The stock carries a Zacks Rank #2 (Buy). You can see the complete list of today’s Zacks #1 Rank (Strong Buy) stocks here.
Canonsburg, PA based CONSOL Energy CEIX carries a Zacks Rank #3 (Hold). The company owns and operates its mining operations in the Northern Appalachian Basin. The Zacks Consensus Estimate for its current-year earnings has been revised upward to the tune of 10.4% in the past 60 days.
Arrow Electronics ARW provides products, services and solutions to industrial and commercial users of electronic components and enterprise computing. The company, based in Centennial, CO carries a Zacks Rank #2. The company delivered positive earnings surprise in three of the trailing four quarters. The average beat is 2.8%.
Clearwater Paper Corporation CLW: This Spokane, WA-based company carries a Zacks Rank #3. The company produces pulp and paperboard at multiple facilities across the United States. The Zacks Consensus Estimate for 2020 earnings has soared in excess of 100% on a year-over-year basis.
AutoNation AN is the largest automotive retailer in the United States. The company, carrying a Zacks Rank #2, also offers vehicle maintenance and repair services, vehicle parts, extended service contracts and vehicle protection products. The company has a long-term (three to five years) expected growth rate of 3.5%.
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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AutoNation, Inc. (AN) : Free Stock Analysis Report
Builders FirstSource, Inc. (BLDR) : Free Stock Analysis Report
Arrow Electronics, Inc. (ARW) : Free Stock Analysis Report
Clearwater Paper Corporation (CLW) : Free Stock Analysis Report
Consol Energy Inc. (CEIX) : Free Stock Analysis Report
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