Proper guidance is often the difference between success and failure in life. The same holds true for the investing world. The need for proper guidance is all the more required now as the Q4 earnings season is not too far away. Investors are on the lookout for stocks, which have the potential to surpass earnings expectations in the upcoming reporting cycle. It is a well-known fact that earnings beat generally leads to stock price appreciation.
However, the task of designing one’s portfolio with outperformers is by no means an easy one. The uncertainties in the investment world make the task of selecting stocks for handsome returns a daunting one. Moreover, a number of stocks flood the market at any given point in time. 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 to be experts, equipped with vast knowledge of investing.
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.
Be Guided by Earnings Estimate Revisions
Broker ratings are backed by sound logic and are by no means arbitrary. 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 revise estimates or recommendation on a stock, they often assume that there is something that has attracted analysts’ 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.
Ignore the Top Line at Your Own Peril
A strategy designed solely on the basis of the bottom line is unlikely to result in a winning strategy. 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 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:
ArcBest Corporation ARCB provides freight transportation services and solutions. This Zacks Rank #1 (Strong Buy) stock has seen the Zacks Consensus Estimate for 2019 earnings being revised upward to the tune of 10.5% over the past 60 days.
American Airlines Group AAL operates more than 6,700 daily flights to over 330 destinations in more than 50 nations across the globe from its hubs. American Airlines is headquartered in Fort Worth, TX and carries a Zacks Rank #2 (Buy). The Zacks Consensus Estimate for 2019 earnings has increased 8.8% in the past 60 days.
Cardinal Health CAH is a nation-wide drug distributor and provider of services to pharmacies, healthcare providers and manufacturers. The company, carrying a Zacks Rank #3 (Hold), has an expected earnings per share growth rate (next 3 to 5 years) of 6.3%. Moreover, it has an impressive earnings track record, having surpassed expectations in three of the trailing four quarters with the average surprise being 9.3%.
Century Aluminum Company CENX is engaged in the production of primary aluminum in the United Sates and Iceland. This Chicago-based company carries a Zacks Rank #2. It has an impressive earnings track record, having surpassed expectations in three of the trailing four quarters with the average surprise being 57.3%.
CVS Health Corporation CVS is a pharmacy innovation company with integrated offerings across the entire spectrum of pharmacy care. This Woonsocket, RI-based company carries a Zacks Rank #2. The Zacks Consensus Estimate for 2019 earnings has increased 1.9% in the past 60 days.