Broker ratings are often the decisive factor behind investment decisions. Arriving at such decisions is by no means easy for individual investors as these involve picking the right stocks from diverse industries. In fact, the process is as demanding as spotting a needle in a haystack, especially if the investor is unaided.
This is where guidance from brokers comes into play. Of the three types of brokers/analysts (sell-side, buy-side and independent), sell-side analysts dominate the investment world. Various brokerage firms employ them to provide unbiased opinion to investors after thorough analysis. Buy-side analysts are employed by hedge funds, mutual funds, and others while the independent ones simply sell their reports to investors.
Brokers not only scrutinize the publicly available financial documents but also attend company conference calls and other presentations. Naturally, it is in the best interest of investors to pay heed to such well-researched information as they aim to rake in maximum returns from their portfolio.
Earnings Estimate Revisions – A Winning Pointer
Since the action of brokers is guided by sound logic, 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 look to 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.
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.
# (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 the top 3000 stocks in terms of 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:
Anixter International AXE is a leading global distributor of network, security, electrical, and utility power products and services. The company, sporting a Zacks Rank #1 (Strong Buy), is headquartered in Glenview, IL. The company’s current-quarter earnings are projected to grow 5.6% while that of its industry are expected to decline 12.9%. You can see the complete list of today’s Zacks #1 Rank stocks here.
CVS Health CVS is a pharmacy innovation company with integrated offerings across the entire spectrum of pharmacy care. The company, carrying a Zacks Rank #2 (Buy), is headquartered in Woonsocket, RI. The company has a solid earnings surprise history having surpassed estimates in each of the past four quarters by an average of 5.9%.
AmerisourceBergen ABC is one of the world’s largest pharmaceutical services companies. This Zacks Rank #2 company focuses on providing drug distribution and related services to reduce health care costs and improve patient outcomes. The Zacks Consensus Estimate for current-year earnings has increased 2.8% in the past 60 days.
AECOM ACM is a leading solutions provider for supporting professional, technical and management solutions for multiple industries across end markets like transportation, facilities, government as well as those in environmental, energy and water businesses. The company, carrying a Zacks Rank #3 (Hold), is headquartered in Los Angeles, CA. The Zacks Consensus Estimate for current-year earnings indicates increase of 3.5% from 2018 reported level.
Best Buy Company BBY, carrying a Zacks Rank #3, is headquartered in Richfield, MN. The company is a multinational specialty retailer of consumer electronics, home office products, entertainment software, communication, food preparation, wellness, heath, security, appliances and related services. The Zacks Consensus Estimate for current-quarter earnings has increased 8.3% in the past 60 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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Anixter International Inc. (AXE) : Free Stock Analysis Report
AECOM (ACM) : Free Stock Analysis Report
Best Buy Co., Inc. (BBY) : Free Stock Analysis Report
CVS Health Corporation (CVS) : Free Stock Analysis Report
AmerisourceBergen Corporation (ABC) : Free Stock Analysis Report
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