Analysts devote a great deal of time to studying different companies. They publish earnings estimates that are widely followed and are almost always wrong. Although the earnings estimates may be the most visible part of an analyst’s job, they are not necessarily the most important.
In addition to providing estimates, analysts also rate companies using some type of a “buy, hold or sell” scale. These ratings help portfolio managers find winners in the stock market and avoid potential losers. That makes the ratings valuable to managers as a starting point for their own research.
Analysts spend a great deal of time and effort to come up with these ratings. The reason is that this could be the quickest way for an analyst to get noticed by a portfolio manager and if the ratings help the manager, the manager will often reward the analyst’s firm with more business.
Ultimately, that is the real goal of Wall Street analysts. They do strive to produce accurate earnings estimates and target prices. But, their primary goal is to produce research that helps increase the revenue of their firm.
Analysts’ Goals Can Offer Valuable Insights
Different numbers of analysts will follow different companies. A large cap company like Apple (Nasdaq: AAPL) will be followed by dozens of analysts. Smaller companies may have just a few analysts covering the company and some companies may have just a single analyst producing research.
When there are just a few analysts covering a company, the analysts have a large incentive to deliver high quality and accurate research. With just a few research reports available, a portfolio manager may notice the analyst who covers their favorite companies. Being noticed can lead to increased business for the firm.
This is a valuable insight for us as individual investors. It means that small companies with favorable research coverage could be stocks that deliver large returns. We created a quantitative screen based on that insight this week.
We started by limiting our search to companies that are rated as strong buys by analysts. Then, we searched for growth. We required that the company have reported growth in earnings per share (EPS) of at least 25% in the past year.
Finally, we focused on stocks priced at less than $5 per share. The reason we like cheap stocks is because these are the ones that have been proven to be most likely to deliver large gains.
One study looked at how low priced, or cheap, stocks performed relative to more expensive stocks. The study found that cheap stocks delivered more than six times the average return of the more expensive stocks in a typical quarter.
One way to find stocks meeting these requirements is with the free stock screening tool available at FinViz.com. At this site, you could screen for a variety of fundamental factors, high levels of institutional ownership and bullish institutional transactions. An example is shown below.
Five Stocks Meet Our Strict Requirements
Remember, there is no guarantee any stock will increase in value. Also, it is important to remember when we search for stocks using quantitative measures, our goal is to identify stocks that meet those criteria. The screens we develop could be used as the cornerstone of long term investment strategies but any individual stock in the list could be a winner or loser.
Aqua Metals, Inc. (Nasdaq: AQMS) engages in the business of recycling lead. It has developed AquaRefining, a process for recycling lead acid batteries.
Lead futures appear to be emerging from a multiyear consolidation pattern as the chart of lead futures below shows.
Momentum is bullish and AQMS could be a cheap way to gain exposure to the lead market.
Athersys, Inc. (Nasdaq: ATHX) focuses on the research and development activities in the field of regenerative medicine. The company’s clinical development programs are focused on treating neurological conditions, cardiovascular diseases, inflammatory and immune disorders, and pulmonary and other conditions.
The company’s lead platform product includes MultiStem cell therapy, an allogeneic stem cell product, which has completed Phase 2 study for treating patients suffering from moderate and severe ischemic stroke; that is in Phase 2 clinical study for treating patients with acute myocardial infarction; and, which is in Phase 1/2 clinical study for treating patients with acute respiratory distress syndrome, as well as completed Phase 1 clinical study for patients suffering from leukemia or various other blood-borne cancers.
The stock appears to be turning higher after an extended decline and this could be a timely buy.
Christopher & Banks Corporation (NYSE: CBK) operates as a specialty retailer of private-brand women’s apparel and accessories in the United States. The company designs and sells women’s apparel and accessories to customers ranging in age from 40 and older.
Its stores offer women’s apparel consisting of casual clothing, everyday basics, wear-to-work, leisure/active wear, and sleepwear in missy, petite, and women sizes, as well as jewelry and accessories through approximately 479 stores, including 319 MPW stores, 82 Outlet stores, 40 Christopher & Banks stores, and 38 CJ Banks stores in 45 states.
This stock also appears to be breaking out of an extended consolidation. It trades at about 70% of its book value indicating little downside risk in the stock assuming the company continues to operate as a retailer.
Good Times Restaurants Inc. (Nasdaq: GTIM) engages in restaurant business in the United States.
It operates Good Times Burgers & Frozen Custard, a regional chain of quick service restaurants; and owns, operates, franchises, and licenses Bad Daddy’s Burger Bar, a full service, upscale small box restaurant concept.
The company operates and franchises approximately 38 restaurants under the Good Times Burgers & Frozen Custard name in Colorado and Wyoming; and 26 Bad Daddy’s Burger Bar restaurants in Colorado, Oklahoma, North Carolina, and South Carolina.
This chart shows the familiar pattern of a potential bottom seen in other stocks we’ve highlighted above.
Sky Solar Holdings, Ltd. (Nasdaq: SKYS) develops, owns, and operates solar parks worldwide.
It develops projects; and generates and sells electricity in the downstream solar market.
The company also sells solar energy systems, including pipeline and related engineering, construction, and procurement services, as well as is involved in building and transferring solar parks.
The company developed more than 130 solar parks with an aggregate capacity of 160.6 megawatts (MW) in Greece, Japan, Bulgaria, the Czech Republic, Spain, Canada, the United States, and Uruguay; and owned and operated 159.8 MW of solar parks with more under construction.
The company is expected to report earnings per share of $0.10 in 2018 and could deliver a significant gain if it trades at just 10 to 12 times earnings.
Any of these stocks could be a potential winner and all worth further research. For those unsure of their ability to dedicate the time to researching the market, the TradingTips.com service, PPK System, is designed to exploit patterns associated with market clues by looking for value and momentum in stocks.
This combination of value and momentum has been shown by many researchers to be the cornerstone of strategies that beat the market in the long run. The PPK System follows strict rules for buying and selling. You can learn more about this trading service by clicking here.