With the Q1 earnings season still in its initial stages, investors would like to add stocks with the potential to surpass earnings expectations to their respective portfolios. This is because an earnings beat generally leads to stock price appreciation. However, the task of designing one’s portfolio with potential outperformers is quite a daunting one. The task becomes even more difficult in this scenario of high inflation and the resultant uncertainty and slowdown in consumer spending. Naturally, individual investors will find it next to impossible to design a winning portfolio of stocks without proper guidance amid this turbulence.
The choice of improper stocks can adversely impact returns, ruining the objective of investing one’s hard-earned money in the highly unpredictable stock market. In a bid to avoid such a scenario, investors usually rely on guidance from proper sources.
In the field of investing, brokers are deemed to be experts with thorough knowledge. We believe that investors should include broker-favorite stocks like American Airlines AAL, Delta Air Lines DAL, CVR Energy CVI, Cleveland-Cliffs CLF and Delek US Holdings DK in their watchlist
Why Broker Guidance is the Need of the Hour
Brokers, irrespective of their types (sell-side, buy-side or independent), have at their disposal a lot more information on a company and its prospects than individual investors. 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.
Since brokers indulge in meticulous research, the question of their actions being arbitrary does not arise. The direction of the estimate revisions serves as an important pointer regarding the price of a stock. Given the expertise of brokers in investment matters, it is natural for investors to believe that there is a solid reason/logic behind their improving the recommendation on a particular stock.
To take care of the earnings performance, we have designed a screen based on improving analyst recommendation and upward estimate revisions over the last four weeks.
Ignore Top line at Your Own Peril
To design a winning strategy, it is not prudent to consider the bottom line only. In fact, according to some market watchers, a top-line outperformance is more creditable for a stock than a mere earnings beat under some circumstances. Therefore, to make our strategy full-proof, one needs to address top-line concerns as well. We have considered the price/sales ratio, which serves as a strong complementary valuation metric, for screening stocks.
# (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.
Price-to-Sales = Bot%10: The lower the ratio, the better. Companies meeting this criterion are in the bottom 10% of our universe of over 7,700 stocks.
Price greater than 5: A stock trading below $5 will not likely be of significant interest to most investors.
Average Daily Volume greater than 100,000 shares over the last 20 trading days: Volume has to be significant to ensure that these are easily traded.
Market value ($ mil) = Top #3000: This gives us stocks that are the top 3000 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 passed the screen test:
American Airlines is based in Fort Worth, TX. The gradual increase in air-travel demand (particularly for leisure) is aiding AAL. However, high fuel costs are hurting the bottom line.
Over the past 60 days, the Zacks Consensus Estimate for AAL’s 2023 earnings has been revised 14.8% upward. American Airlines currently carries a Zacks Rank #2 (Buy). You can see the complete list of today’s Zacks #1 Rank (Strong Buy) stocks here.
Delta, currently carrying a Zacks Rank of 2, is based in Atlanta, GA. DAL is being bolstered by an uptick in demand for air travel (particularly for leisure). Driven by higher air-travel demand, total revenues increased 36.5% on a year-over-year basis in first-quarter 2023.
High fuel costs are, however, a bane. Over the past 60 days, the Zacks Consensus Estimate for DAL’s 2023 earnings has been revised 3.1% upward.
CVR Energy is an independent refiner and marketer of high-value transportation fuels. CVI is also a producer of ammonia and urea ammonia nitrate fertilizers. Its petroleum business includes a full-coking sour crude refinery in Coffeyville, KS. The company’s efforts to reward its shareholders underline its strong financial position. The robust Nitrogen Fertilizer unit supports growth.
CVR Energy, currently sporting a Zacks Rank #1, surpassed the Zacks Consensus Estimate in each of the past four quarters by an average of 40.85%. The Zacks Consensus Estimate for current-year earnings has improved 42.1% over the past 60 days.
Cleveland-Cliffs is a leading iron ore producer in the United States. It supplies differentiated iron ore pellets under long-term contracts to major blast furnace steel producers in North America. The Mining and Pelletizing operation gains from low-cost, high-quality iron ore pellet production with substantial logistics and transportation advantages to serve the Great Lakes steel market. The company should gain from its merger with AK Steel Holding Corporation.
Over the past 60 days, the Zacks Consensus Estimate for CLF’s 2023 earnings has been revised 13.7% upward. Cleveland-Cliffs currently carries a Zacks Rank #3 (Hold).
Brentwood, TN-based Delek US Holdings is an independent refiner, transporter and marketer of petroleum products. DK’s extensive downstream operations within the Permian Basin grant it a fairly significant competitive edge over its peers in the long term.
Delek US Holdings currently carries a Zacks Rank #3. DK surpassed the Zacks Consensus Estimate for earnings in three of the past four quarters (missing the mark in the other one). The average beat is in excess of 100%.
You can get the rest of the stocks on this list by signing up now for your 2-week free trial to the Research Wizard and start using this screen in your own trading. Further, you can also create your own strategies and backtest them first before taking the investment plunge.
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Disclosure: Officers, directors and/or employees of Zacks Investment Research may own or have sold short securities and/or hold long and/or short positions in options that are mentioned in this material. An affiliated investment advisory firm may own or have sold short securities and/or hold long and/or short positions in options that are mentioned in this material.
Disclosure: Performance information for Zacks’ portfolios and strategies are available at: https://www.zacks.com/performance.
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