After making a strong start to the year, major indexes are slipping again and ended February in the red. The hotter-than-expected inflation reading for the month of January implies that inflation-related concerns are certainly not a thing of the past.
With inflation rising again, many market watchers believe that the central bank will resort to a 50-basis point hike in the March FOMC meeting as opposed to the 25-basis point hike witnessed in its February FOMC meeting.
Hotter-than-expected inflation has once again raised fears that the Fed might continue with its tight monetary control and interest rate hike policy for a longer- than-expected period. Higher interest rates shoot up the cost of borrowing, escalating the chances of an economic slowdown.
Inflationary woes primarily resulted in extreme market volatility and with rate hike worries getting stronger, such volatility is unlikely to dissipate any time soon. Does the current turbulence and economic uncertainty imply that investors should turn their backs on equities? The answer is an absolute no. So, what’s the way forward to reap handsome returns from one’s portfolio even during the current uncertainty?
One way to proceed in this scenario is by adhering to broker advice. By following this method, broker-friendly stocks like, American Airlines AAL, CVR Energy CVI, Beazer Homes USA BZH, Asbury Automotive ABG and Avnet AVT should be included in an investor’s watchlist for healthy returns.
Brokers, irrespective of their types (sell-side, buy-side or independent), undertake thorough research of the stocks covered by them. They 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.
Since brokers follow the stocks in their coverage minutely, they revise their earnings estimates 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 immediately influence the price of the stock.
Given the expertise of brokers the field of investing, it is natural for investors to believe that there is a solid reason/logic behind brokers improving their recommendation on a particular stock. In fact, a rating upgrade generally leads to stock price appreciation and vice versa. Estimates can move north for a number of reasons — favorable earnings performance, a bullish guidance, product launch or any favorable macro scenario.
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 the Top Line at Your Peril
To design a winning strategy, considering the bottom line alone is not prudent. 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 the 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 the 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.
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 the 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:
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 stock has seen the Zacks Consensus Estimate for 2023 earnings being revised 31.1% upward. AAL currently carries a Zacks Rank #2 (Buy).
You can see the complete list of today’s Zacks #1 Rank (Strong Buy) stocks here.
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. CVI's petroleum business includes a full-coking sour crude refinery in Coffeyville, KS. Its efforts to reward its shareholders underline its strong financial position. The robust Nitrogen Fertilizer unit is supporting 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 85% over the past 60 days.
Beazer Homes: This Atlanta, GA-based homebuilder designs, builds and sells single-family homes. BZH, currently carrying a Zacks Rank #3 (Hold), designs homes that appeal primarily to entry-level and first move-up homebuyers. BZH’s subsidiary, Beazer Mortgage, originates the mortgages for the company's homebuyers.
The company’s Balanced Growth strategy, higher pricing, lower sales incentives and a solid backlog level are expected to improve profitability. BZH has seen an upward estimate revision of 2.9% for current-year earnings over the past 60 days. This depicts analysts’ optimism about the company’s prospects.
Asbury: Asbury is one of the largest automotive retailers of new and used vehicles, and related services in the United States. The acquisition of Larry H. Miller Dealerships has bolstered Asbury’s regional footprint and strengthened its revenue base. ABG’s end-to-end e-commerce platform—Clicklane—is also anticipated to be an impressive revenue generator.
Asbury carries a Zacks Rank #3 presently. ABG surpassed the Zacks Consensus Estimate for earnings in each of the last four quarters. The average beat is 7.06%.
Avnet is benefiting from robust demand for its products across Asia, Europe, the Middle East and Africa regions. Improvement in the Americas also served as a tailwind. Its continued focus on boosting IoT capabilities is helping it expand in the newer markets and win customers. Moreover, cost-saving efforts are aiding profitability.
Avnet, currently carrying a Zacks Rank of 3, has an impressive surprise history, with its earnings surpassing the Zacks Consensus Estimate in each of the last four quarters, the average being 15.5%.
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 test them first before taking the investment plunge.
The Research Wizard is a great place to begin. It's easy to use. Everything is in plain language. And it's very intuitive. Start your Research Wizard trial today. And the next time you read an economic report, open up the Research Wizard, plug your finds in, and see what gems come out.
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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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