5 Stocks Set To Pop On Analyst Upgrades

Investors, while designing their portfolio of stocks, solely aim at raking in handsome returns. However, the task is easier said than done because selecting the right stocks out of a deluge at any point of time is no mean feat. Given the time constraint that we all face, it is quite impossible for individual investors to have thorough knowledge about all stocks.

This is where the experts come in, who help investors design a portfolio that promises great returns. The specialists in the field of investing are brokers who have in-depth idea about the stock market.

There are generally three categories of brokers (sell-side, buy-side and independent) in the investment world. Sell-side analysts, who are employed by various brokerage firms to provide unbiased opinion on the stocks under their coverage after thorough research, are most prevalent. Buy-side analysts are employed by hedge funds, mutual funds etc. while the independent ones simply sell their reports to investors. The thing common to all the three types is that they indulge in extensive research on stocks in their coverage before coming up with recommendations (Buy, Sell or Hold).

Brokers explore all possible avenues as part of their extensive research on a company. They not only scrutinize the publicly available financial documents, but also attend company conference calls and other presentations before arriving at their recommendations.

Earnings Estimate Revisions

Given the wealth of information at the disposal of brokers, it is in the best interests of investors to be guided by broker advice and the direction of their estimate revisions. The action of brokers is guided by sound logic and is by no means arbitrary. Thus, the direction of estimate revisions serve as an important pointer regarding the price of a stock.

For example, an earnings beat by a company generally leads to upward estimate revisions with prices moving north. Similarly, lackluster earnings results often lead to stock price depreciation. Investors tend to be guided by the direction of estimate revisions and stock price while formulating their investment strategy. 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.

Top Line to be Considered as Well

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 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 criterion 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:

Dean Foods Company (NYSE:DF) , based in Dallas, TX, is a leading processor and distributor of milk and other dairy products in the U.S. as well as a leading manufacturer of various specialty food products. The Zacks Consensus Estimate for earnings in 2016 is projected to increase 31.5%, higher than the industry average of 26.5%. The company carries a Zacks Rank #2 (Buy). You can see Zacks Investment Research

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Written By: Zacks Investment Research