Knowing the exactly right time to jump aboard a stock is no easy feat. First, you are combating the powerful force of the overall market that exerts much influence. Then you have the arduous task of deciding if and when the stock will jump into the spotlight for increased favor. It can take a lot of due diligence to spot the various triggers that could bring a stock to the forefront before the eyes of willing investors. A simple approach that has historically yielded good results is to buy stocks when they are upgraded by analysts with accompanying positive future earnings revisions. Why might this approach be an appropriate short cut?
On one hand, many investors follow the advice of analysts. If you purchase near an upgrade, you could benefit from the resulting buying pressure. Secondly, the assumption is that the analyst has dug into the stock and spotted some catalysts that warranted an upgrade. While you should not blindly follow an analyst upgrade recommendation, it does provide a good starting point for further investigation.
Below are a few stocks that have received upgrades without any downgrades over the past week with an upward revised quarterly earnings forecast.
AXT Inc. (AXTI): This semiconductor company is up over 20% over the past five trading days. The earnings report on July 27 exceeded expectations by 46.9%. The company expects to report earnings for the next quarter between 18 and 20 cents per share where the previous consensus was 16 cents just a few days ago. Earnings for the year have also been modestly raised. This positive news led one broker to raise his hold recommendation to a buy. With support below at $8.50, this is a solid buy bucking the overall trend.
Basic Energy Services (BAS) is a small cap company with strong annual price performance and relative strength. But not everyone thinks this is a slam-dunk, as almost 20% of the shares are short, which is up from the previous month. The most recent quarter had earnings 2 cents below the consensus estimate. That being said, the forward-looking estimates are still being pumped up. Over the last seven days, the next quarter, current year, and following year have all received favorable upwards revisions.
On July 25, BMO Capital Markets upgraded the stock to market perform, and over the past month a strong buy rating was added. The median price target now sits at $43. Although there are some positive signals with this stock, I’d hold off until I saw something in the range of $28-30 before initiating a position based on price performance.
Energy Partners (EVEP), which is engaged in the oil and natural gas market, has jumped up from around $64 a few days ago to $70 today. July 22 saw Wunderlich upgrade the stock to a buy and July 29 saw Oppenheimer upgrade the stock to outperform. This stock has a forward dividend yield of 4.3%. On August 9, earnings will come out. Estimated sales growth is strong with a range of 83.8-89.4% over the next two quarters, and the current year revenue growth is guessed at 75.9%. One cautionary note is that while this quarter’s earnings are anticipated to be slightly higher than what was thought seven days ago, the estimates for next quarter as well as this year and next year have dropped. I would wait a week and see what sort of earnings numbers – but more importantly, forward guidance – come from the quarterly announcement. If it is positive, you may want to consider adding a position in EVEP.
If you want to take advantage of the 5.7% dividend yield of Sunoco Logistics Partners (SXL), then you should be aware of the August 4 ex-dividend date. Some prefer to wait until after the dispersing of income for taxation reasons, whatever the circumstance that is your call to make. The July 26 earnings call held an 86% surprise, which often leads to a nice post-earnings announcement drift. While this stock may be a bit shy on certain upgrade requirements (it came up on the Zacks screener, yet I cannot find the specific upgrades), I would still give this a buy rating provided it can keep its head above the $87 dollar range that it is currently bobbing on.
Rising and Upgraded Stocks
When the markets are changing directions at break-neck speeds, one profitable tactic is to look for stocks with upward revisions. But you also need to be careful to monitor your stocks for when they fail to meet these projections or when downward revisions come in. Also look for stocks as they near support ranges, or as they break out in new highs to add a crude timing technique.