While designing their portfolio, an investor may end up making a wrong choice. This can be due to a lack of expertise in identifying outperformers from a plethora of stocks on the market at any point of time.
Choice of improper stocks can adversely impact investors’ returns, thereby ruining the very objective of investing their hard-earned money in the highly unpredictable stock market. In a bid to avoid such a scenario, investors, more often than not rely on guidance from proper channels.
Broker Advice – The Savior
In the field of investing, brokers are deemed to be experts, equipped with thorough knowledge. 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.
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 on their course of action (buy, sell or hold) on a particular stock.
Be Guided by Earnings Estimate Revisions
Since brokers indulge in meticulous research, the question of their actions being arbitrary/out of the blue does not arise. The direction of estimate revisions serves as an important pointer regarding the price of a stock. In fact, a rating upgrade normally leads to stock price appreciation and vice versa.
Given the expertise of brokers in investment matters, it is natural for investors to believe that there is a solid reason/logic behind brokers improving their recommendation on a particular stock. In fact, a rating upgrade generally leads to stock price appreciation and vice versa. Estimates can move north for a number of reasons – favorable earnings performance, a bullish guidance, product launch or any favorable macro scenario.
To take care of the earnings performance, we have designed a screen based on improving analyst recommendation and upward estimate revisions over the last four weeks.
Revenues Performance – A Key Pointer
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). Therefore, one must take the top-line performance into consideration as well while formulating a winning strategy. 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 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 eliminates the ADR and Canadian stocks.
Here are five of the 10 stocks that made it through the screen:
Delek US Holdings Inc (NYSE:DK) has a diversified energy business focused on petroleum refining, marketing and supply of refined products, and retail marketing of fuel and general merchandise. The company sports a Zacks Rank #1 (Strong Buy). The Zacks Consensus Estimate for current-quarter earnings improved approximately 3.1% over the last 7 days.
Findlay, OH-based Marathon Petroleum Corp (NYSE:MPC) is a leading independent refiner, transporter and marketer of petroleum products. This Zacks Rank #3 stock saw the Zacks Consensus Estimate for current-quarter earnings being revised upward to the tune of approximately 6% over the last 30 days.
Archer Daniels Midland Co (NYSE:ADM) is one of the leading food processing companies in the world. This Illinois-based company carries a Zacks Rank #3. The company has an impressive track record with respect to earnings per share, having outshined the Zacks Consensus Estimate in three of the last four quarters. The average beat was 13.3%.
Manitowoc, WI-based Manitowoc Company Inc (NYSE:MTW) is a leading global manufacturer of cranes and lift solutions. The company, which carries a Zacks Rank #3, offers one of the broadest lines of lifting equipment in the industry. The Zacks Consensus Estimate for current-quarter earnings improved 16% over the last 60 days.
Phillips 66 (NYSE:PSX) is a diversified energy manufacturing and logistics company with midstream, chemicals, refining, and marketing and specialties businesses. This Zacks Rank #3 (Hold) company is based in Houston, TX. The Zacks Consensus Estimate for current-quarter earnings improved 2.8% over the last 30 days.
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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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