The Q1 earnings season is at an early stage with reports available from only a handful of companies. A high proportion of companies are yet to unveil their numbers. This is a very busy time for investors looking to add stocks, which have the potential to surpass earnings expectations in the current reporting cycle. This is because an earnings beat generally leads to stock price appreciation.
However, the task of selecting stocks for handsome returns is by no means easy with a plethora of stocks flooding the market at any given point in time. The uncertainties in the investment world make the task even more daunting. This is all the more true now, as uncertainty has gripped investors owing to the Syria-related tensions and the well-documented concerns about Facebook.
In this backdrop, identifying a winning stock is akin to searching for ‘a needle in a haystack’, for an investor. Proper guidance, in this respect, comes from brokers, who are deemed to be experts, with vast knowledge of investing.
Generally, there are three types of brokers/analysts (sell-side, buy-side and independent) present in the investment world. Out of the three, 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.
Broker Advice - An Invaluable Guide
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 generate maximum returns from their portfolio.
Since brokers closely follow the stocks in their coverage, they revise earnings estimates only 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 influence the price of the stock.
Naturally, when investors see brokers revising their estimates or recommendation on a stock, they often assume that there is something in the stock that has attracted analyst attention.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 any favorable macro scenario.
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 in 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).
We have also added the following screening parameters to ensure that the strategy is a winning one:
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 (as a stock trading below $5 will not likely create significant interest for most of the investors).
Average Daily Volume greater than 100,000 shares over the last 20 trading days (Volume has to be significant to ensure that these are easily traded).
Market value ($ mil) = Top #3000 (This gives us stocks that are the top 3000 in terms of 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:
Caleres, Inc. CAL is a footwear retailer and wholesaler. The company is headquartered in St. Louis, MO. This Zacks Rank #3 (Hold) stock has an impressive expected earnings per share growth rate of 11% for three to five years. You can see the complete list of today’s Zacks #1 Rank (Strong Buy) stocks here.
Archer Daniels Midland Company ADM is one of the leading food processing companies in the world. It procures, transports, stores, processes, and merchandises agricultural commodities and products. This Zacks Rank #1 company has an average four-quarter positive earnings surprise of 1.7%.
Headquartered in Tampa, Florida, WellCare Health Plans, Inc WCG offers government-sponsored managed care services. This Zacks Rank #2 (Buy) company has an impressive earnings history, having outshined the Zacks Consensus Estimate in each of the last four quarters with an average beat of 53.9%.
Comstock Resources, Inc. CRK, headquartered in Frisco, TX, is an oil and gas exploration and production company engaged in exploitation activities of crude resources. This Zacks Rank #2 company delivered a positive earnings surprise of 67% in the last reported quarter.
Pittsburgh, PA-based United States Steel Corporation X is a leading steel manufacturer in the United States and the fifth largest in the world.This Zacks Rank #1 stock has an impressive expected earnings per share growth rate of 8% for three to five years.
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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WellCare Health Plans, Inc. (WCG) : Free Stock Analysis Report
Comstock Resources, Inc. (CRK) : Free Stock Analysis Report
Caleres, Inc. (CAL) : Free Stock Analysis Report
United States Steel Corporation (X) : Free Stock Analysis Report
Archer Daniels Midland Company (ADM) : Free Stock Analysis Report
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