5 Broker-Friendly Stocks to Combat Market Jitters

Markets have been rattled by escalating trade war tensions between the world’s two biggest economies — United States and China. The uncertainty is further highlighted by the fact that the Cboe Volatility Index (VIX), referred to as Wall Street’s fear gauge, is moving up and is on track for its biggest monthly gain.

Trade wars are certainly not good for the economy and squeeze corporate profit margins. This ongoing trade tension is weighing on investors’ risk appetite. Apart from trade war related tensions, modest results in the first-quarter earnings season also do not bode well for investors.

Broker Advice – The Way Forward in this Scenario

In view of the prevalent uncertainty, the task of building a portfolio of stocks for handsome returns is by no means an easy task.  Furthermore, with a huge number of stocks present in the market at any point of time, spotting potential outperformers is tough for individual investors. In the absence of proper guidance, identifying a winning stock is akin to searching for ‘a needle in a haystack’.

Given this backdrop, it is in the best interest of investors to seek guidance from “experts in the field." The concerned experts are brokers. Brokers have a deeper insight into what’s happening in a particular company along with better understanding of the overall sector and the industry.

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 arrive at their recommendation (buy, sell or hold) on a stock after thoroughly analyzing the nitty-gritties 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. 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.

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 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:

Avis Budget Group CAR carrying a Zacks Rank #3 (Hold) is based inNew 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. You can see the complete list of today’s Zacks #1 Rank (Strong Buy) stocks here.