What's Driving Estimates on New Strong Buy Stocks?

It’s easy to list everything that’s wrong with the market right now: the typical September sell-off, the still-high valuations, looming election-driven volatility, U.S.-China trade concerns, signs of a second wave of infections in some regions and worst of all, likely delays in the availability of a vaccine.  

So easy in fact that we may even overlook the positives, which make an equally long list. These would be the V-shaped recovery, the promise of zero interest rates and maximum employment, other supportive measures for the economy, the steadily declining unemployment rate, the positive ISM data (PMI above 50% since May, indicating steady economic expansion) and finally, rising estimates for a large number of companies.

Our latest earnings trends report shows that third and fourth quarter estimates continue to move up, with third-quarter earnings expectations moving from -26.5% on Jul 2 to -23.4% on Sep 18. Full-year earnings expectations have also moved up from a low of -24.4% on Jul 2 to -20.9% on Sep 18.

The sectors likely to report positive revenue growth in Q3 are Medical, Retail/Wholesale, Technology and Construction. While other sectors will be down, the decline isn’t uniform, nor will the recovery be.

So, for example, there could easily be opportunities in sectors like Utilities (to decline less than 1% in Q3), Finance (less than 2%), Consumer Staples (less than 3%) and Auto (around 3%). That really gives us quite a few choices, if we can refine our decision-making.

I’m a great advocate of sticking to safety, although I know that a certain amount of risk-taking can probably generate more substantial gains. But I do enjoy my night’s sleep.

So if I know of any safe investing method, I’m going to stick with it. Like the Zacks Rank system that pulls out stocks with the best chances of upside and separates out stocks that are best avoided right now. When you consider that market makers are always going to be out there, buying and selling stocks, the ranking system makes all the more sense. So the first rule of investing in stocks is to go for a stock with a Zacks Rank #1 (Strong Buy) or #2 (Buy).

As explained above, not all sectors, or the industries housed within them, will do equally well. The Zacks Industry Rank can be leveraged to determine the industries that will do better than others. The general rule is that we want to invest in the top 50% of the 250+ Zacks-classified industries because historical data shows that these industries outperform the bottom 50% by a factor of more than 2 to 1.

Moreover, around half the stock’s price movement is attributable to the industry it’s in because there are common factors driving stocks in the same industry. And because that’s just the way sentiments move too.

Most importantly, we want to invest in stocks seeing positive estimate revisions. That’s what I’m focusing on with these Zacks Rank #1 stocks that also operate in attractive industries.

DaVita Inc. DVA

DaVita offers outpatient dialysis services, hospital inpatient dialysis services and ancillary services such as end stage renal disease (ESRD) laboratory services and disease management services to patients suffering from chronic kidney failure.

DaVita’s 2020 earnings grew 11 cents and 2021 earnings grew 21 cents in the last 7 days. The increase was related to its Dutch auction tender offer, under which 8,000,679 shares, or 6.6% of total outstanding shares, will be bought back.

This is in addition to the 62-cent increase in the 2020 estimate and 68-cent increase in the 2021 estimate 30 days ago, the result of a solid earnings report. The company offers the kind of services that typically don’t wax and wane with changing economic conditions. However, the fact that it already offered telehealth services and has already launched its artificial intelligence system to predict future business and improve operational efficiencies shows that it is also up to speed with the recipe for growth in the new normal.

ExlService Holdings, Inc. EXLS

The company’s operations management and analytics business is all about developing customer-centric operating models and enabling digital transformation to  improve global operations, enhance data-driven insights, increase customer satisfaction, and manage risk and compliance. It has clients across the insurance, healthcare, banking and financial services, utilities, travel, transportation and logistics industries.

ExlService’s 2020 and 2021 earnings estimates have moved up 44 cents and 31 cents, respectively over the last 7 days. The estimate revision was driven by the raising of its fiscal 2020 guidance. Accordingly, revenue is now expected to be $945 million and $955 million compared to prior guidance of $922 million to $938 million (up 2.2% at the midpoint). Earnings guidance is up from $2.60-$2.80 to $3.35-$3.45 (up 25.9% at the midpoint). The guidance was raised because the company is seeing a stronger-than-expected rebound.

Prior to this, the 2020 earnings estimate went up by 34 cents while the 2021 estimate was retained, when the company reported stellar results, topping the Zacks Consensus by 65.6%. In this case, EXLS offers services that are of great importance to companies as they try to cope with the challenges thrown up by COVID.

As a result of the revised expectations, earnings are now expected to grow in both 2020 and 2021. Revenue estimates for 2020 are still slightly behind, but the company could ultimately beat the numbers if the strength in the business continues.  

Wrapping Up

It can get difficult to come to any investment decision, when there’s so much conversation, both positive and negative, doing the rounds. It’s at times like this that it pays to stick to the basics. Keep your eyes on the Zacks Rank, Zacks Industry Rank and the earnings estimate revisions. That’s the safest way to pick the best!  

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The views and opinions expressed herein are the views and opinions of the author and do not necessarily reflect those of Nasdaq, Inc.

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