5 Broker-Favorite Stocks To Watch Out For

With the Q2 earnings season in nascent stage, investors would like to add stocks with the potential to surpass earnings expectations to their respective portfolio. This is because an earnings beat generally leads to stock price appreciation.

However, the task of designing one’s portfolio with potential outperformers is anything but an easy one. The task becomes even more difficult when one tries to select a winning portfolio without proper guidance.

It is often observed that one falters in life owing to lack of proper guidance. This is applicable to the investing world as well. With a plethora of stocks flooding the market at any point of time, it is highly possible for an investor to make a wrong choice while designing one’s portfolio, in the absence of proper know-how or expertise. Moreover, the time constraint that we all have to confront these days makes the task of making proper choices harder.

Choice of improper stocks can adversely impact returns, thereby ruining the very objective of investing one’s hard-earned money in the highly unpredictable stock market. In a bid to avoid such a scenario, investors usually rely on guidance from proper sources.

Broker Advice – The Way Forward

In the field of investing, brokers are deemed to be experts 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.

To attain their objective, 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 their course of action (buy, sell or hold) on a particular stock.

Earnings Estimate Revisions – A Winning Pointer

Since brokers indulge in meticulous research, the question of their actions being arbitrary does not arise. The direction of the 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 their improving the recommendation on a particular stock. 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 Not to be Ignored

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.

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.

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:

Denver, CO-based Antero Resources Corporation (NYSE:AR) is an independent explorer, primarily engaged in the acquisition and development of natural gas, natural gas liquids and oil resources in the Appalachian Basin. The company carries a Zacks Rank #2 (Buy). The Zacks Consensus Estimate for current-year earnings improved 17.7% over the last 60 days. You can see Zacks Investment Research

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Written By: Zacks Investment Research