5 Stocks In The Limelight On Recent Broker Rating Upgrades

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 just round the corner. This is because investors would look to add stocks to their respective portfolios, which have the potential to surpass earnings expectations in the current reporting cycle. This is because an earnings beat generally leads to stock price appreciation.

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 a daunting one. Moreover, a deluge 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.

Earnings Estimate Revisions – A Proper Guide

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 revising their estimates or recommendation on a stock, they often assume that there is something in the stock that has attracted analyst 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.

Framing a 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 foolproof.

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 for 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:

Sonic Automotive (NYSE:SAH) is one of the leading automotive retailers in the United States. Apart from selling new and used cars and light trucks, the company offers warranties, service contracts, vehicle financing and insurance. This Zacks Rank #2 (Buy) stock has seen the Zacks Consensus Estimate for fourth-quarter earnings being revised 14.5% upward over the last 90 days. You can see the complete list of today’s Zacks #1 Rank (Strong Buy) stocks here.

Target Corporation (NYSE:TGT) , founded in 1902, and headquartered in Minneapolis, MN, operates as a general merchandise retailer in the United States. The company provides an array of goods ranging from household essentials and electronics to toys and apparel for men, women and kids. Target, carrying a Zacks Rank #3 (Hold), has an impressive record with respect to earnings per share. It has outpaced the Zacks Consensus Estimate in three of the last four quarters with an average beat is 10.2%.

Envision Healthcare Corporation (NYSE:EVHC) , founded in 1992 and based in Nashville, TN, is a provider of healthcare services in the United States. Envision’s offerings include a strongly differentiated, scaled suite of solutions within the physician-led services sector. The company, carrying a Zacks Rank #3, has an impressive expected earnings per share growth rate (next 3 to 5 years) of 12%.

Beazer Homes USA (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 #3 company, based in Atlanta, GA, has an impressive earnings track record, having surpassed expectations in three of the last four quarters with an average surprise in excess of 100%.

Group 1 Automotive (NYSE:GPI) is one of the leading automotive retailers in the world. Apart from selling new and used vehicles, Group 1 Automotive offers vehicle financing and insurance and service contracts. This Zacks Rank #3 stock has seen the Zacks Consensus Estimate for fourth-quarter earnings being revised 2.7% upward over the last 90 days.

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.

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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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