Third-quarter earnings season is well underway and investors are looking at interim results and weighing company prospects for the rest of the year. Not a bad idea, if the Reuters Select stock screens are anything to go by: The Rising Expectations screen, which highlights companies with improving prospects, has outpaced all others since the end of July with a gain of nearly 8 percent, slightly ahead of the second-place 7-percent rise by the Sales Growth Leaders screen and the 6-percent advance in the S&P 500 index.
The Rising Expectations screen focuses on earnings surprises, upward revisions in analyst estimates, and stock-price performance. It does not, however, take into consideration price factors such as valuation or quality indicators such as profit margins, which we used to narrow down our list from the 25 companies that recently landed on the Rising Expectations screen. In the end, Greek oil-shipping company Tsakos Energy Navigation Ltd. (NYSE:TNP) was the last stock standing. (Click here to download an Excel spreadsheet comparing the companies that recently appeared on the Reuters Select Rising Expectations screen.)
We started with valuation. It would be easy enough to simply filter for companies that have price to earnings (P/E) ratios that are below the averages for their respective industries. But, since we are looking at companies that have been beating estimates and where analysts have been penciling in higher figures for performance down the road, we have to accept that many of these firms will likely be trading at above-average valuations. As such, we allow for some wiggle room and filter for firms that have P/E ratios that are no more than 10 percent above the industry norm. This reduced our list to 15 names.
We then turned our attention to quality measures. We filtered for companies with superior and improving profit margins. The reason for this is twofold: On one hand, wider profit margins allow more revenue to turn into earnings; on the other hand, companies with wider profit margins should be better able to handle tough business conditions if the economy loses steam. We filtered for companies with wider-than-average operating margins over the last five years and then again in the trailing 12-month period. This left us with five names.
Finally, we focused on the company that had the largest margin advantage over its industry averages. As indicated above, this is where Tsakos Energy Navigation took top honors.
To appear on the Relative Expectations screen, Tsakos Energy Navigation had to report actual earnings per share [EPS] that beat analyst estimates in each of the last four quarters.
Having cleared that hurdle, Tsakos Energy Navigation then faced the screen requirement that the current-year consensus estimate must stand higher than it stood just four weeks ago and that estimate must be above the estimate from another four weeks prior. At present, the consensus of analyst EPS estimates is $8.06, up from $7.76 two months ago.
Finally, the screen takes into consideration stock-price performance. Not only do we want companies that have grown faster than analysts anticipated, we also want stocks that are in a general uptrend. The screen requires that a stock must have outperformed the industry average over the last four weeks. Tsakos Energy Navigation shares advanced about 6.3 percent over the last month. By comparison, the average stock gain during this period was only 5.9 percent.
At the time of publication, Erik Dellith did not own shares of any company mentioned in this article. He may be an owner, albeit indirectly, as an investor in a mutual fund or an Exchange Traded Fund.
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