Zacks
Recent Analyst Upgrades Add Luster to These 5 Stocks
Maharathi Basu

In This Article:

Investors aim to design a portfolio of stocks that will fetch them handsome returns. However, the task is easier said than done. Given the time constraint that we all face, it is not possible for individual investors to have thorough knowledge about all stocks.

In the absence of proper guidance, identifying a winning stock is akin to searching for ‘a needle in a haystack’, for an investor. The proper guidance, in this respect, comes from brokers, who are deemed experts, equipped with vast knowledge and know how as far the field of investing is concerned.

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

Earnings Estimate Revisions – A Proper Pointer

Broker ratings are backed by sound logic. Brokers not only scrutinize the publicly available financial documents but also attend company conference calls and other presentations. Naturally, it is in the best interest of investors to pay heed to such well-researched information as they aim to generate maximum returns from their portfolio.

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

Don’t Ignore the Top Line

While we have talked about the bottom line in detail, the top line (revenue part) cannot be overlooked. Actually, according to many market watchers a revenue beat is more creditable for a company than a mere earnings outperformance, especially in an environment of revenue weakness due to macroeconomic headwinds like a strong dollar or lackluster demand for travel (which will hurt travel-focused companies). To address top-line concerns, we have included in our screen the price/sales ratio, which serves as a strong complementary valuation metric.

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