Bet On These 5 Broker-Favorite Stocks For Solid Returns

"Rule No.1: Never lose money. Rule No. 2: Never forget rule No.1"! - Warren Buffett, founder and CEO of Berkshire Hathaway (NYSE:BRKa) and commonly regarded as one of the greatest investors of all time.

Investors intend to follow basic rules of investing as they put their hard earned money into a stock. However, the plethora of stocks flooding the market makes it a daunting task for individual investors.

Selecting the right stocks involves a lot of research and cannot be done arbitrarily. 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” as they endeavor to build a winning portfolio to generate handsome returns. The concerned experts are brokers.

Broker Advice: An Invaluable Pointer

Generally, three types of brokers (sell-side, buy-side and independent) are present in the investment world, with sell-side analysts being most common. They are employed by various brokerage firms to provide unbiased opinion to investors on the stocks under their coverage after thorough research. Buy-side analysts are employed by hedge funds, mutual funds etc. while the independent ones simply sell their reports to investors. Brokers, irrespective of their types, do intense research on stocks in their coverage before coming up with recommendations.

Brokers/analysts attend company conference calls/presentations and scrutinize every detail available publicly before advising investors about their course of action (buy, sell or hold a stock). In view of their expertise and profound understanding of stocks and the surroundings of the investing world, it is a no-brainer that investors should pay heed to broker advice to generate garner the maximum from their portfolios.

Earnings Estimate Revisions

Since brokers follow the stocks in their coverage closely, they revise their earnings estimates on a stock after carefully examining the pros and cons of an event for the concerned company. Their action is certainly not arbitrary or illogical. Thus, the estimate revisions serve as an important guide 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.

Value the Top line

To design a winning strategy it is not wise to consider only the bottom line only. In fact, according to some market watchers, a top-line outperformance is more creditable for a stock than a mere earnings beat, under some circumstances. Therefore, to make our strategy full-proof, one needs to address top-line concerns as well. We have considered the price/sales ratio, which serves as a strong complementary valuation metric, for screening stocks.

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 criterion are in the bottom 10% of our universe of over 7,700 stocks.

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 in terms of market capitalization.

Here are 5 of the 10 stocks that passed the screen:

Barnes & Noble, Inc. (NYSE:BKS) is a leading retail bookseller and retailer of content, digital media and educational products in the U.S. The company has an impressive return profile with estimated 3–5 year earnings growth rate of 10%. Barnes & Noble also has an impressive earnings history, having outshined the Zacks Consensus Estimate in three of the last four quarters by an average of 8.22%. The stock – carrying a Zacks Rank #3 (Hold) – has appreciated 26.5% year to date.

Detroit, MI-based General Motors Company (NYSE:GM) is a leading global automotive company. The company filed voluntary petitions for relief under Chapter 11 of the U.S. Bankruptcy Code on Jun 1, 2009. Pursuant to this, the New GM was formed by acquiring most of the assets and assuming certain liabilities of the Old GM, and some of its direct and indirect subsidiaries. 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 21.86%. The stock carries a Zacks Rank #3.

Based in Columbus, OH and founded in 1967, Big Lots, Inc. (NYSE:BIG) is a broad-line closeout retailer in the U.S. 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). You can see Zacks Investment Research

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Written By: Zacks Investment Research