5 Stocks Made Attractive By Recent Broker Rating Upgrades

The second-quarter reporting cycle is in full swing with multiple companies coming up with their quarterly financial numbers. The picture that has emerged so far is quite encouraging and the season remains on track to end on a strong note. A high proportion of companies have reported better-than-expected earnings per share in the current reporting cycle.

Generally, an earnings beat leads to an appreciation in stock price. Given this highly bullish backdrop, investors would like to add outperformers to their respective portfolios for healthy returns.

However, the task is far from easy with a plethora of companies present in the market. Moreover, the complexities associated with the stock market make it even more difficult for individual investors to select outperformers in the absence of proper guidance.

Be Guided by Broker Advice

The requisite guidance to design a winning portfolio comes from brokers. Brokers, not only scrutinize the publicly available financial documents, but also attend company conference calls and other presentations.

Since brokers arrive at their recommendation (buy, sell or hold) on a stock after thoroughly analyzing the nitty-gritty associated with the company, it is natural for investors to be guided by the direction of estimate revisions while deciding their course of action on a particular stock. Estimate revisions serve as an important pointer regarding the price of a stock.  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.

Making the Most of Broker Opinions

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 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 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).

We have also added the following screening parameters to ensure that the strategy is a winning one:

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(as a stock trading below $5 will not likely create significant interest for most of the 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).

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:

St. Louis, MO-based Express Scripts Holding Company (ESRX - Free Report) is the largest pharmacy benefit manager (PBM) in North America. It has an impressive record with respect to earnings, having surpassed the Zacks Consensus Estimate in three of the last four quarters by an average of 0.62%. It carries a Zacks Rank #3 (Hold). You can see the complete list of today’s Zacks #1 Rank (Strong Buy) stocks here.

Abercrombie & Fitch Co.(ANF - Free Report) operates as a specialty retailer of premium, high-quality casual apparel for men, women, and kids through a network of over 700 stores in the United States and multiple stores across Canada, Europe, Asia, Australia and the Middle East. This Zacks Rank #3 stock has an impressive expected earnings per share growth rate of 14% for 3–5 years.

New Albany, OH-based Commercial Vehicle Group, Inc. (CVGI - Free Report) supplies interior systems, vision safety solutions and other cab-related products for the global commercial vehicle market. Last quarter, this Zacks Rank #1 company had posted earnings of 8 cents per share, while our expectation was of a breakeven.

DXP Enterprises, Inc. (DXPE - Free Report) supplies maintenance, repair and operating products, equipment and services to industrial customers. Over the last 60 days, the Zacks Consensus Estimate for this Zacks Rank #2 (Buy) company rose 2.5% to 81 cents for 2017 and 3.2% to $1.28 for 2018.

Plains GP Holdings, L.P. (PAGP - Free Report), through its subsidiaries, is involved primarily in the transportation, storage, and marketing of crude oil and refined products. The Zacks Consensus Estimate for this Zacks Rank #3 stock has increased 9.1% to 24 cents per share over the last 30 days.

Disclosure: Zacks.com contains statements and statistics that have been obtained from sources believed to be reliable but are not guaranteed as to accuracy or completeness. References to any specific ...

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