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First Cut Stocks Investing Gurus

Charles’ “Buy of the Week” EPS Revision Screen

Twenty S&P 1500 member stocks with P/Es below their five-year average high and rising earnings estimates.

by Charles Rotblut | April 2018

Charles Rotblut leads a class in AAII's new Essential Investing Video Course. Go to https://www.aaii.com/ves for more information and to subscribe.

Each week, I select a stock to feature as a “buy” or a “sell” on Money Life with Chuck Jaffe. The stocks selected can be recent additions or deletions from one of our model portfolios: Shadow Stock, AAII Dividend Investing, Stock Superstars Report or VMQ Stocks. They can also be stocks passing one of the more than 60 stocks screens available in the Stock Ideas section of AAII.com. (Audio clips of the podcast are posted to the AAII Blog at http://blog.aaii.com/category/podcast).

Periodically, I use one of two custom screens to select the buy or the sell, using AAII’s Stock Investor Pro fundamental stock screening and research database. Both are modified versions of our earnings estimate revisions screens.

My buy screen, highlighted here, seeks stocks with positive revisions to their earnings estimates made within the past 30 days. My sell screen seeks stocks with negative earnings estimate revisions made within the past 30 days.

Earnings estimate revisions are changes to the I/B/E/S consensus earnings estimates. These are the average of all earnings projections made available by the brokerage analysts covering a given stock. Positive revisions have been shown to lead to above-market returns, while negative revisions have been shown to lead to below-market returns.

Stocks are also required to have either met or exceeded the consensus earnings estimate for the most recent quarter. An earnings miss may suggest that analysts are too optimistic or that they are having a hard time predicting how the company will actually perform.

Since Chuck asks for how much potential upside (or downside) a stock may have, I include a relative valuation measure in the screens. Specifically, I require a stock’s price-earnings (P/E) ratio to be below its five-year average high; preferably below its five-year average P/E. Such stocks are currently trading at valuations below what investors historically have been willing to pay. To prevent stocks with excessively high P/E ratios from passing the “buy” screen, I also require the current price-earnings ratio to be no higher than 30.

To narrow down the list further, companies must have grown sales and earnings per share over the last 12 months. The screen is also restricted to companies included in the S&P Composite 1500 index to identify companies that listeners to the podcast are more likely to be familiar with. (The S&P Composite 1500 encompasses the S&P 500, the S&P MidCap 400 and the S&P SmallCap 600 indexes.)

As of our publication date, 58 companies passed the screen. The 20 with the most positive earnings estimates are listed in the table here.

Stocks Passing Charles’ Buy Screen

Stocks Passing Charles’ Buy Screen
Source: AAII’s Stock Investor Pro, Thomson Reuters. Data as of March 19, 2018.


Criteria for Stock Investor Pro Users

Download the Excel spreadsheet

Field Operator Compare to
Standard and Poor stock  Not Equal  None       
EPS Est Y0-% Rev-Last Month         > 0
EPS Est Y0-% Rev-Last Month     > 0
PE < PE-Average 5 years   
PE         < PE High - Average 5 years      
Sales-Growth 12m  > 0
EPS Dil Cont-Growth 12m > 0
EPS Est Y0     > EPS-Diluted Continuing Y1      
Quarterly Surprise-Percent   > 0
PE           < 30

Discussion

Tony Santiago from CA posted over 8 years ago:

Should the 3rd criteria be a duplicate of the 2nd? The monthly print version doesn't explicitly list the SIP criteria.


Tom Tucker from PA posted over 8 years ago:

I implemented this screen using March 19 data. The screen produced 59 companies instead of the 58 mentioned in the article. All the numbers for the 20 companies listed in the article agree with my results. Would it be possible to get a copy of Mr. Rotblut's 58 company listing so I can identify my extra company? This may seem like a trivial request, 59 is after all pretty close to 58. However, when you're running a stock screening tool, little differences can mean a lot. Thanks.


John from Texas posted over 6 years ago:

Why did he use PE less than 30? This seems to high.


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