Watch Out For These 5 Stocks After Broker Rating Upgrades
Zacks Investment Research | Nov 20, 2017 10:20PM ET
The Q3 reporting cycle, which is almost over, has unveiled a healthy picture. With only a handful of companies left to report, the season is expected to end on a high, displaying significant earnings growth. In addition to recording bottom-line growth, a sizeable number of companies have reported better-than-expected earnings per share.
Generally, an earnings beat leads to stock price appreciation. Given this favorable background, investors would like to add outperformers to their portfolios as they strive to design a portfolio of stocks that will fetch them handsome returns.
However, the task is by no means an easy one. This is because the investing world is full of uncertainties and stock prices are sensitive to recent developments. Additionally, the same group of stocks may not work under all circumstances.
For example, airline stocks may benefit from declining oil prices but may fall out of favor in the event of oil prices moving up. One of the well-accepted strategies to brave market uncertainties is to maintain a well-diversified (i.e. include stocks from different industries) portfolio.
Therefore, selecting the right stocks involves thorough 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”. The concerned experts are brokers.
Such investment specialists attend conference calls, company presentations and also interact with management. Brokers revise their earnings estimates after carefully examining the pros and cons of an event for the concerned stock. Naturally, their stock related actions (upgrade or downgrade) serve as an invaluable guide as far as fixing the target price of a stock(s) is concerned as they have a lot more information on a company and its prospects than individual investors. In fact, a rating upgrade normally leads to stock price appreciation and vice versa.
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 effective.
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 the 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:
Verso Corporation (NYSE:VRS) is a key player in the paper industry. The company, based in Memphis, United States, focuses on the production of coated freesheet, coated ground wood and uncoated super calendered papers and pulp. Current quarter estimates for this Zacks Rank #2 (Buy) stock have been revised 60% higher over the last seven days.
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