The ongoing earnings season has unveiled a rosy picture so far with many companies reporting better-than-expected earnings. According to the latest Earnings Preview, 78.6% of the 341 S&P 500 companies that have reported thus far have outperformed earnings estimates.
This is highly encouraging as an earnings beat generally leads to stock price appreciation. Investors like to add outperformers to their portfolios, which can fetch them handsome returns.
Markets Narrate a Different Story
Despite the impressive Q4 performance, the U.S. equity market has been witnessing a roller coaster ride. Both the Dow as well as the S&P 500 entered into the correction territory on Feb 9, down more than 10% from the all-time high reached in January.
The steep sell-off was due to stronger-than-expected job additions along with fastest wage growth in more than eight years. These factors, in turn, triggered fears of inflation and bolstered expectations that the Fed could take a more aggressive stance in hiking rates than previously expected.
The heightened volatility is reflected in the significant increase in the CBOE Volatility Index (VIX)
Proper Guidance – A Must in this Scenario
With market participants gripped by fears on the one hand and robust earnings numbers on the other, selecting potential winning stocks is a difficult task.
Furthermore, with a huge number 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, identifying a winning stock is akin to searching for ‘a needle in a haystack’.
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.
Broker Advice to the Rescue
The “experts” in the field of investing are brokers who are equipped with detailed knowledge about the space. Brokers, irrespective of their types (sell-side, buy-side or independent), 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. Broker opinion should thus act as a valuable guide for investors while deciding their course of action (buy, sell or hold) on a particular stock.
Earnings Estimate Revisions
Since brokers meticulously follow the stocks in their coverage, they revise their earnings estimates after carefully examining the pros and cons of an event for the concerned company. The estimate revisions serve 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, lackluster earnings often lead to stock price depreciation. Investors tend to be guided by the direction of estimate revisions and stock price while formulating their investment strategy.
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 effective.
Screening Criteria
# (Up- Down Rating)/ Total (4 weeks) =Top #75: This gives the list of top 75 companies that have witnessed net upgrades over the last four 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 four 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 the 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:
Sysco Corporation (NYSE:SYY), through its subsidiaries, markets and distributes a range of food and related products primarily to the foodservice or food-away-from-home industry. The company is headquartered in Houston, TX.
It has an impressive history with respect to earnings surprises, having outpaced the Zacks Consensus Estimate in three of the last four quarters. The average beat for this Zacks Rank #2 (Buy) stock is 1.1%.
New Albany, OH-based Commercial Vehicle Group, Inc. (NASDAQ:CVGI) supplies interior systems, vision-safety solutions and other cab-related products to the global commercial vehicle market. The stock sports a Zacks Rank #1. The company’s average four-quarter earnings surprise exceeds 100%.
Beazer Homes USA, Inc. (NYSE:BZH) is one of the country’s largest single-family homebuilders with a presence in Arizona, California, Delaware, Florida, Georgia, Indiana, Maryland, Nevada, North Carolina, South Carolina, Tennessee, Texas and Virginia. This Zacks Rank #2 company, based in Atlanta, GA, has an impressive earnings track record, having surpassed expectations in each of the last four quarters with an average surprise in excess of 100%.
Builders FirstSource, Inc. (NASDAQ:BLDR) manufactures and supplies building materials, manufactured components, and construction services to professional contractors, sub-contractors, and consumers in the United States. The company has an impressive track with respect to earnings, having surpassed the Zacks Consensus Estimate in each of the last four quarters by an average of 58.6%. The company carries a Zacks Rank #2.
Centene Corp (NYSE:CNC) is a well-diversified, multi-national healthcare company that primarily provides a set of services to government sponsored healthcare programs. This Zacks Rank #1 company has an impressive earnings track record, having surpassed expectations in each of the last four quarters with an average surprise of 9.8%.
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.
Click here to sign up for a free trial to the Research Wizard today.
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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