Investors aim to design a portfolio of stocks that will fetch them handsome returns. However, the task is easier said than done. Given the time constraint that we all face, it is not possible for individual investors to have thorough knowledge about all stocks.
In the absence of proper guidance, identifying a winning stock is akin to searching for ‘a needle in a haystack’, for an investor. The proper guidance, in this respect, comes from brokers, who are deemed experts, equipped with vast knowledge and know how as far the field of investing is concerned.
Of the three types of brokers/analysts (sell-side, buy-side and independent) present in the investment world, 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.
Earnings Estimate Revisions – A Proper Pointer
Broker ratings are backed by sound logic. 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.
Don’t Ignore the Top Line
While we have talked about the bottom line in detail, the top line (revenue part) cannot be overlooked. Actually, according to many market watchers a revenue beat 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 in our screen the price/sales ratio, 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.
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 criterion 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 30
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:
Headquartered in San Francisco, CA, ABM Industries ABM provides engineering, janitorial, parking, and facility solutions to commercial, industrial, institutional, and retail facilities. ABM Industries, carrying a Zacks Rank #3 (Hold), has an impressive track record with respect to earnings, having surpassed the Zacks Consensus Estimate in each of the trailing four quarters with the average surprise being 9.2%.
Irving, TX- based Commercial Metals Company CMC manufactures, recycles and markets steel and metal products, related materials and services. The stock carries a Zacks Rank #3. The Zacks Consensus Estimate for current-year earnings has been revised upward to the tune of 4.7% over the past 60 days.
Incorporated in 1966 and headquartered in Richfield, MN, Best Buy Company BBY is a multinational specialty retailer of consumer electronics, home office products, entertainment software, communication, food preparation, wellness, heath, security, appliances and related services. This Zacks Rank #2 (Buy) company has witnessed the Zacks Consensus Estimate for current-year earnings been revised 1.6% upward over the past 60 days. You can see the complete list of today’s Zacks #1 Rank (Strong Buy) stocks here.
C&J Energy Services CJ provides onshore well construction, well completion and support to oil and gas exploration and production companies. This Zacks Rank #3 company also offers complementary oilfield services. Texas-based C&J Services surpassed the Zacks Consensus Estimate in three of the trailing four quarters, the average beat being 11.6%.
Dick's Sporting Goods DKS, based in Coraopolis, PA, operates as a major omni-channel sporting goods retailer, offering athletic shoes, apparel, accessories and a broad selection of outdoor and athletic equipment for team sports, fitness, camping, fishing, tennis, golf, water sports, etc. The stock carries a Zacks Rank #3. The Zacks Consensus Estimate for current-year earnings has been revised 1.2% upward over the past 60 days.