Proper guidance is often the difference between success and failure in life. The same holds true for the investing world. In the absence of proper guidance, identifying a winning stock is akin to searching for ‘a needle in a haystack’. Proper guidance, as far as investing is concerned, comes from brokers, who are deemed to be experts, equipped with vast knowledge of investing.

Of the three types of brokers/analysts (sell-side, buy-side, and independent) present in the investment world, sell-side analysts are most common. Various brokerage firms employ them to provide an unbiased opinion to investors 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 type, attend company conference calls/presentations and scrutinize every detail available publicly before advising investors about their course of action. Individual investors, more often than not, do not have access to such detailed and well-researched information.

Earnings Estimate Revisions – A Proper Guide

Broker ratings are backed by sound logic and are by no means arbitrary. Since brokers closely follow the stocks in their coverage, they revise earnings estimates only after carefully examining the pros and cons of an event for the concerned company. In fact, a rating upgrade or downgrade by brokers has the potential to influence the price of the stock.

Naturally, when investors see brokers revising their estimates or recommendation on a stock, they often assume that there is something in the stock that has attracted analyst attention. In fact, a rating upgrade generally leads to stock price appreciation. Similarly, the price of a stock may plummet following a rating downgrade.

Estimates can move north for a number of reasons – favorable earnings performance, a bullish guidance, product launch or any favorable macro scenario.

Framing a Winning Strategy

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 foolproof.

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 for 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:

American Airlines Group (AAL - Free Report) operates more than 6,700 daily flights to over 330 destinations in more than 50 nations across the globe from its hubs.American Airlines is headquartered in Fort Worth, TX and carries a Zacks Rank #3 (Hold). The Zacks Consensus Estimate for 2019 earnings has increased 3.7% in the past 60 days. 

Atlas Air Worldwide Holdings (AAWW - Free Report) is a provider of outsourced aircraft and aviation operating services across the globe.

The company is based out of Purchase, NY and carries a Zacks Rank #2 (Buy). The Zacks Consensus Estimate for the current year has improved 4.9% over the past 60 days.

C&J Energy Services (CJ - Free Report) provides onshore well construction, well completion and support to oil and gas exploration and production companies. This Zacks Rank #3 company also offers complementary oilfield services. Texas-based C&J Services surpassed the Zacks Consensus Estimate in three of the trailing four quarters with the average beat being 3.9%.

Builders FirstSource (BLDR - Free Report) manufactures and supplies building materials, manufactured components, and construction services. The Zacks Consensus Estimate for its current-quarter earnings has moved up 57.1% in the past 60 days. The stock carries a Zacks Rank #3. 

Dana Incorporated (DAN - Free Report) is a manufacturer and seller of driveline, sealing and thermal-management products for vehicle manufacturers. The stock carries a Zacks Rank #2. The Zacks Consensus Estimate for current-year earnings is projected to increase 2.8% on a year-over-year basis.