With the Q3 earnings season round the corner for most of the sectors, investors will be eager to add stocks that have the potential to surpass earnings expectations in the quarter. This is because an earnings beat generally leads to stock price appreciation.
Investors, after all, while putting their hard earned money in the stock market, are governed by the sole objective of generating handsome returns from their portfolio. No one wants to see his/her hard-earned money go down the drain.
However, the task of designing one’s portfolio with potential outperformers is anything but an easy one. In fact, equity market tricks are not easy to master with a plethora of stocks flooding the space at any point of time. The task becomes even more difficult when one tries to select a winning portfolio without proper guidance. With the time constraint confronting us these days, it is in the best interest of investors to be guided by the experts in the field.
Broker Advice to the Rescue
The concerned experts are brokers. Brokers, irrespective of their types (sell-side, buy-side or independent) undertake 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.
Earnings Estimate Revisions – A Winning Pointer
The action of brokers is by no means arbitrary and is instead guided by sound logic. Thus, 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 would 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
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.
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 takes out the ADR and Canadian stocks.
Here are five of the 10 stocks that made it through the screen:
Based in Columbus, OH and founded in 1967, Big Lots, Inc. (NYSE:BIG) is a broad-line closeout retailer in the United States. The company offers products under various merchandising categories, which include Food, Consumables, Furniture, Seasonal, Soft Home, Hard Home, and Electronics & Accessories. The company has an impressive track record with respect to earnings, having surpassed the Zacks Consensus Estimate in each of the past four quarters by an average of 81.1%. The stock carries a Zacks Rank #2 (Buy). You can see the complete list of today’s Zacks #1 Rank (Strong Buy) stocks here.
Build-A-Bear Workshop, Inc (NYSE:BBW) is the only national company providing a make-your-own stuffed animal interactive retail-entertainment experience. This Zacks Rank #3 stock (Hold) has seen the Zacks Consensus Estimate for current-year earnings being revised 17.8% upward over the last 90 days.
Los Angeles, CA-based KB Home (NYSE:KBH) is one of the largest and most recognized homebuilding companies in the United States. The company sells and builds new homes primarily to first-time, move-up and active adult homebuyers with the focus being on first-time buyers, which represents the largest demand segment. The company has an impressive track with respect to earnings, having surpassed the Zacks Consensus Estimate in each of the past four quarters by an average of 12.7%. The stock carries a Zacks Rank #2.
Dynegy Inc. (NYSE:DYN) is a provider of wholesale power, capacity and ancillary services to utilities, cooperatives, municipalities and other energy companies in six states in regions of the Midwest, the Northeast and the West Coast.This Zacks Rank #3 stock has seen the Zacks Consensus Estimate for current-year earnings being revised 19.1% upward over the last 60 days.
Ohio-based AK Steel Holding Corporation (NYSE:AKS) is a leading producer of flat-rolled carbon, stainless, electrical steel and tubular products. The company has an impressive track record with respect to earnings, having surpassed the Zacks Consensus Estimate in each of the past four quarters by an average of 97.9%. The stock carries a Zacks Rank #3.
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.
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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