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5 Stocks in Focus Following Broker Rating Upgrades

The ongoing Q3 earnings season has unveiled a rosy picture with many companies reporting better-than-expected earnings. According to the latest Earnings Preview, 73.9% of the 406 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.

However, the task is by no means an easy one. This is because the investing world is fraught with uncertainties and stock prices are sensitive to recent developments. Additionally, the same group of stocks may not work under all circumstances.

For example, airline stocks may benefit from declining oil prices but may fall out of favor in the event of an increase in oil prices. One of the well-accepted strategies to brave market uncertainties is to maintain a well-diversified (i.e. include stocks from different industries) portfolio.

Furthermore, with a plethora 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.

Why Pay Heed to Broker Advice

The opinion of brokers acts as a valuable guide for investors while deciding their course of action (buy, sell or hold) on a particular stock. They have a lot more information on a company and its prospects than individual investors. This is because they not only scrutinize the publicly available financial documents but also attend company conference calls and other presentations.

Given their expertise, it is prudent for investors to pay heed to broker advice while formulating their investment strategy. 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.

Moreover, broker ratings are backed by sound logic. Estimate revisions serve as an important pointer regarding the price of a stock. In fact, a rating upgrade normally leads to stock price appreciation and vice versa.

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.

What About the Top Line?

While we have talked about the bottom line in detail, the top line (revenue portion) cannot be ignored. 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.

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 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:

Fiat Chrysler Automobiles N.V. FCAU operates as an international automotive company. The company has an impressive track record with respect to earnings, having surpassed the Zacks Consensus Estimate in three of the last four quarters by an average of 17%. The automobile stock carries a Zacks Rank #2 (Buy). You can see the complete list of today’s Zacks #1 Rank (Strong Buy) stocks here.

Boise Cascade Company BCC operates as a wood products manufacturer and building materials distributor. The company, based in Boise, ID, has an impressive track record with respect to earnings, having surpassed the Zacks Consensus Estimate in three of the last four quarters by an average of 116.3%. The stock carries a Zacks Rank #2.

Avis Budget Group CAR provides vehicle rental services through a network of approximately 10,000 car and truck rental locations in the United States, Canada, Australia, New Zealand, Latin America, the Caribbean and parts of Asia. The Zacks Consensus Estimate for the third quarter has been revised 2.1% higher over the last 60 days.

EnLink Midstream ENLC, based in Dallas, TX, focuses on natural gas gathering, treatment, processing, transmission, distribution, supply and marketing along with crude oil marketing. Current quarter estimates for this Zacks Rank #3 (Hold) stock has been revised almost 143% higher over the last 90 days.

Delek US Holdings DK operates as an integrated energy company that provides petroleum refining and transportation services. The company operates in two segments, Refining and Logistics. The Zacks Consensus Estimate for current-quarter earnings has been revised 142% higher over the last 60 days. 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.

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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Avis Budget Group, Inc. (CAR): Free Stock Analysis Report
 
Fiat Chrysler Automobiles N.V. (FCAU): Free Stock Analysis Report
 
Boise Cascade, L.L.C. (BCC): Free Stock Analysis Report
 
Delek US Holdings, Inc. (DK): Free Stock Analysis Report
 
EnLink Midstream, LLC (ENLC): Free Stock Analysis Report
 
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