The possibility of an all-out trade war between the world’s two biggest economies — United States and China — has resulted in markets being volatile of late. President Trump imposed steep tariffs on China with the threat of more to come if China decides to retaliate.

In fact, it is not only China but fears pertaining to a global trade war that have gripped investors. In June, President Trump attacked Canada and other U.S. allies on this front through a series of tweets.  After the EU announced that from Jun 22 import tariffs of more than $3.2 billion will be levied on a variety of American products, Trump retaliated with auto tariffs.

Trade wars are certainly not good for the economy and squeeze corporate profit margins. Consequently, this ongoing trade tension is weighing on investors’ risk appetite.

Broker Advice – The Way to Go in this Scenario

In view of the prevalent uncertainty, the task of building a portfolio of stocks for handsome returns is by no means an easy task.  Furthermore, with a huge number of stocks present in the market at any point of time, spotting potential outperformers is tough for individual investors. In the absence of proper guidance, identifying a winning stock is akin to searching for ‘a needle in a haystack’.

Additionally, 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.

Brokers have a deeper insight into what’s happening in a particular company along with better understanding of the overall sector and the industry.

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.

Direction of Earnings Estimates: An Invaluable Guide

Since brokers meticulously follow the stocks in their coverage, they revise their earnings estimates after carefully examining the pros and cons of an event for the concerned company. Estimate revisions serve as an important pointer regarding the price of a stock.

For example, an earnings outperformance by a company generally leads to upward estimate revisions with prices moving north. Similarly, lackluster earnings 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.

Making the Most of Broker Guidance

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 in 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 four 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 four 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:

Asbury Automotive Group, Inc. (ABG - Free Report): This automotive retailer is based in Duluth, GA and carries a Zacks Rank #2 (Buy). The Zacks Consensus Estimate for current-year earnings improved 0.9% over the last 60 days. 

Oklahoma-based Chesapeake Energy Corporation (CHK - Free Report) is an independent oil and gas company engaged in the acquisition, development, and production of onshore U.S. natural gas resources. The stock carries a Zacks Rank #3 (Hold). The Zacks Consensus Estimate for current-year earnings improved 5.2% over the last 60 days.

Based in Los Angeles, CA, KB Home (KBH - Free Report) is a well-known homebuilder in the United States. This Zacks Rank #3 company has an impressive history with respect to earnings per share. It outshined the Zacks Consensus Estimate in each of the last four quarters, with an average beat of 16.8%.

American Axle & Manufacturing Holdings, Inc. (AXL - Free Report) designs, engineers, validates and manufactures driveline, metal forming, powertrain, and casting products. The company has a Zacks Rank #2. The Zacks Consensus Estimate for its current-year earnings increased 4.3% in the last 60-day period.

Cooper Tire & Rubber Company (CTB - Free Report), headquartered in Findlay, OH, manufactures and markets tires and related products. The stock carries a Zacks Rank #3. The company’s expected EPS growth rate for three to five years currently stands at 4%.