While designing a portfolio, investors always look to garner handsome returns. However, with a deluge of stocks flooding the market at a particular point of time, the task is anything but simple.

In view of the above constraints, proper guidance is needed for success in the investing world. In the absence of proper guidance, identifying a winning stock is akin to searching for ‘a needle in a haystack’ for an investor. Proper guidance, in this respect, comes from brokers who are deemed experts.

Of the three types of brokers/analysts (sell-side, buy-side, and independent) present in the investment world, sell-side analysts are the most common. Various brokerage firms employ the sell-side analysts to provide 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 Winning Pointer

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, bullish guidance, product launch or any favorable macro scenario.

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 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 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 takes out the ADR and Canadian stocks.

Here are five of the 10 stocks that made it through the screen:

Avis Budget Group (CAR - Free Report), carrying a Zacks Rank #3 (Hold), is based in New Jersey. The company provides vehicle rental services through a network of approximately 10,000 car and truck rental locations in the United States, Canada, Australia, New Zealand, Latin America, the Caribbean, and parts of Asia. The Zacks Consensus Estimate for current-quarter earnings has increased 37.3% in the past 60 days. 

Los Angeles, CA-based California Resources Corporation (CRC - Free Report) is one of the largest upstream companies in California. This Zacks Rank #3 stock has seen the Zacks Consensus Estimate for current-year earnings being revised upward in excess of 100% over the past 30 days.

Based in New Jersey, PBF Energy (PBF - Free Report) is a leading refiner of crude. The refineries of the downstream energy player are spread across California, Louisiana, New Jersey, Delaware, and Ohio. PBF Energy, carrying a Zacks Rank #3, surpassed the Zacks Consensus Estimate in three of the trailing four quarters with the average beat being 5.1%.

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, the average beat being 11.6%.

Ford Motor Company (F - Free Report) is an automotive, financial services and mobility company with operations in the United States and across the world. This Zacks Rank #2 (Buy) stock has seen the Zacks Consensus Estimate for current-year earnings being revised upward in excess of 14% over the past 60 days.