Improving Your Value Investing


"You can greatly improve the odds in your favor by adding earnings momentum to your stock selection framework."

Is the fear of losing your hard earned money keeping you away from value investing? You might have experienced a loss despite picking undervalued stocks through several familiar valuation metrics/methods. You can greatly improve the odds in your favor by adding earnings momentum to your stock selection framework.

It's not very difficult. After finding stocks that meet your 'value' standard, you have to make sure that they are also experiencing upward earnings revisions. You greatly minimize the risk of losing money by picking 'value' stocks that have positive earnings momentum.

The Way to Do It
First, identify stocks with low P/E and P/B multiples (a P/E multiple below 15 and a P/B multiple lower than 3 generally indicate value), then look for positive estimate revisions.

Analysts covering a particular stock often increase/decrease their earnings estimates based on certain developments at the company, or sometimes due to the sector or economy-related factors. They do it after their extensive evaluation on the fundamentals of the company. When the earnings estimate of a stock increases faster than its price over a period of time, it is considered undervalued. It indicates that the stock will move higher in the coming days, tracking the trend in estimate revisions.

Keep in mind, however, that positive earnings momentum for stocks with a very small number of analyst coverage could be misleading as there are chances of over-representation from an extremely optimistic view. So, stocks covered by a number of analysts (at least three) would be a safer bet.

Make Things Easier with the Zacks Rank
If you face difficulty in identifying the stocks with solid earnings momentum, looking at the Zacks Rank would help you narrow down your options.

The Zacks Rank is a proprietary quantitative model that uses trends in earnings estimate revisions to classify stocks into five groups: Zacks #1 Rank = Strong Buy, Zacks #2 Rank = Buy, Zacks #3 Rank = Hold, Zacks #4 Rank = Sell and Zacks #5 Rank = Strong Sell. The earnings estimates in the Zacks Model come from brokerage or "sell-side" analysts. Look for Zacks #1 Rank (Strong Buy) and #2 Rank (Buy) stocks, both which will have rising earnings estimates.

(To learn more about the Zacks Rank, visit our Zacks Rank Education section.)

3 Stocks Undervalued by Earnings Momentum
While you will find a number of undervalued stocks based on the above strategy, we believe the following three would be good additions. But don't stop with just these three -- continue exploring your options.

TravelCenters of America LLC (TA - Snapshot Report): With a market capitalization of $158.5 million, it is a full-service national travel center chain in the U.S., with nationwide locations serving hundreds of thousands of professional drivers and other highway travelers each month including virtually all major trucking fleets.
  • Zacks #1 Rank (Strong Buy)
  • P/E Ratio = 4.22; P/B Ratio = 0.47
  • Change in current year estimate (last 4 weeks): 10.77%
  • Change in price (last 4 weeks): 2.61%
  • Number of analysts providing estimates: 3

Collective Brands, Inc. (PSS - Snapshot Report): This company is engaged in the provision of footwear and related accessories worldwide. It operates stores of Payless ShoeSource, the largest specialty family footwear retailer in the Western Hemisphere. The company holds a market capitalization of $1.3 billion.

  • Zacks #1 Rank (Strong Buy)
  • P/E Ratio = 14.19; P/B Ratio = 1.82
  • Change in current year estimate (last 4 weeks): 9.05%
  • Change in price (last 4 weeks): 0.18%
  • Number of analysts providing estimates: 3

HollyFrontier Corporation (HFC - Snapshot Report): It operates as an independent petroleum refiner and marketer in the U.S. It produces light products diesel fuel, jet fuel, specialty lubricant products, liquefied petroleum gas, fuel oil, and specialty and modified asphalt. The company holds a market capitalization of $8.1 billion.

  • Zacks #2 Rank (Buy)
  • P/E Ratio = 5.98; P/B Ratio = 1.39
  • Change in current year estimate (last 4 weeks): 4.90%
  • Change in price (last 4 weeks): 0.20%
  • Number of analysts providing estimates: 15

Keep Track of Changes
Using the power of earnings momentum is no doubt a smart and easy way to benefit from the stock market. But your job doesn't end with just picking the right stocks. Until you book your profit, keep tracking the estimate revision trends. Otherwise, you may someday see that your stock is losing owing to negative estimate revision. Keep a close watch on the earnings estimates, which should be continuously moving higher.

Happy Investing!!!

Kalyan Nandy
Zacks Investment Research

Disclosure: The author has no positions in any stocks mentioned.

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