5 Stocks That Brokers Love Right Now

In the words of hedge fund manager Seth Klarman, “Most investors are oriented toward return, how much they can make and pay little attention to risk, how much they can lose.”

One of the well-accepted winning strategies is to maintain a diversified portfolio that would lead to handsome returns at all times, braving market uncertainties. However, with stocks flooding the market, investors might well falter in their attempts to design an optimum portfolio of stocks aimed at generating handsome returns in the absence of proper expert advice. This guidance comes from brokers whose ratings on a stock are backed by well-assessed logic.

Broker Ratings: Winning Indicators

Brokers indulge in extensive research on the stocks in their coverage, scrutinizing the company’s publicly available documents, attending conference calls and often communicating directly with the top management. Naturally, brokers, irrespective of their type (sell-side, buy-side or independent), are armed with more detailed information on companies compared to individual investors.

Thus, it is obvious that investors will pay heed to such well-researched information to garner maximum returns from their portfolio. If investors notice an upgrade in broker recommendation on a particular stock, they are inclined to believe that there is a strong reason for it. For instance, a company might have raised its earnings guidance based on some positive factors that in turn prompted brokers' optimism on it.

Estimate Revisions: A Pointer to Price Movement

With brokers expected to impart expert knowledge, equipped with profound understanding of stocks, it is natural that rating actions by these specialists serve as a valuable piece of advice for investors.

Upward estimate revisions generally lead to a rise in prices. Notably, estimates can move north for a number of reasons – favorable earnings performance, a bullish guidance, product launch or any favorable macro scenario. Similarly, a stock may fall out of analysts’ favor due to adverse events like lackluster earnings performance or pipeline failure (for a biotech player). Trimming of earnings estimates by brokers often leads to stock price depreciation.

Designing a Winning Portfolio

We have designed a screener to arrive at stocks based on improving analyst recommendation and upward earnings estimate revisions over the last four weeks. However, considering only these factors does not make our strategy foolproof as the top line has not been accounted for.

Actually, according to many market watchers, a top-line 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 the price/sales ratio in our screener 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 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.

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 be of significant interest to 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:

Based in Columbus, OH and founded in 1967, Big Lots, Inc. (NYSE:BIG) is a broad-line closeout retailer in the United States. The company offers products under various merchandising categories, which include Food, Consumables, Furniture, Seasonal, Soft Home, Hard Home, and Electronics & Accessories.The company has an impressive track with respect to earnings, having surpassed the Zacks Consensus Estimate in three of the last four quarters by an average of 8.02%. The stock carries a Zacks Rank #2 (Buy).

New Jersey-based Avis Budget Group Inc. (NASDAQ:CAR) provides vehicle rental services through a network of approximately 10,000 car and truck rental locations in the U.S., Canada, Australia, New Zealand, Latin America, the Caribbean and parts of Asia. The 2016 Zacks Consensus Estimate has improved 3.1% over the 60 days to $2.99 per share. The stock carries a Zacks Rank #2.

DXP Enterprises, Inc. (NASDAQ:DXPE) , based in Houston, Texas, engages in distributing, maintenance, repair and operating (MRO) products, equipment and services to industrial customers in the U.S. The company has surpassed the Zacks Consensus Estimate in three of the last four quarters. The 2016 Zacks Consensus Estimate has improved significantly over the 60 days and currently hints at earnings of 30 cents per share as against a loss of 38 cents around 2 months ago. The stock sports a Zacks Rank #1 (Strong Buy). You can see the complete list of today’s Zacks #1 Rank (Strong Buy) stocks here.

Best Buy Co., Inc. (NYSE:BBY) , incorporated in 1966 and headquartered in Richfield, MN, is a multinational specialty retailer of consumer electronics, home office products, entertainment software, appliances and related services with 1,448 domestic locations and 283 international outlets at the end of fiscal 2015. 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 21.96%. The company carries a Zacks Rank #3 (Hold).

Atwood Oceanics Inc. (NYSE:ATW) is a Texas-based offshore drilling contractor. 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 19.57%. The company 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.

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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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