Written by Kevin Matra
I’m sure we’ve all had the pleasure of waking one morning and seeing that a broker has upgraded one of our stocks. Usually that stock is in for a good day and likely for several days or more after that.
Unfortunately, we’ve probably all had the experience of waking up and seeing one of our stocks downgraded too. Usually that stock is in for a rough day, and probably more days to follow.
And while nobody can perfectly predict an upgrade or guard against a downgrade, it’s important to know how the market reacts to these things. This is so you can stay in your upgraded winners (or buy if you’re on the fence) and consider getting out if a downgrade comes your way.
One thing I’ve been doing lately is screening for stocks that have recently seen a broker rating upgrade. Tests have proven that stocks with broker rating upgrades outperform those that don’t get upgraded and outperform even more substantially those stocks that get downgraded.
By how much?
I created three screens and ran some tests over the last 10 years. And I applied all the below criteria to stocks trading >= $5 with an average daily trading volume of >= 100,000.
In screen 1: I backtested only those companies with broker rating upgrades.
In screen 2: I tested companies with no rating change at all. Whatever the rating was, good or bad, there was no change.
And in screen 3: I screened only those companies that received broker rating downgrades.
Results
The tests pretty much confirmed what I had already suspected – but the magnitude was a lot larger than I thought.
The broker rating upgrades over the last 10 years showed an average annual return of 10.4%.
The ones with no rating change at all showed an average annual rerun of 6.1%.
And the stocks with broker rating downgrades actually showed a loss of -0.3%.
So the upgrades beat the ones with no rating change by nearly twice as much. And they outperformed those with downgrades even more. In fact, that was the difference between making money and losing money.
Below are 5 stocks that have all been upgraded within the last 4 weeks:
1. Fresh Del Monte Produce Inc. (FDP, Earnings, Analysts, Financials): Produces, transports, sources, markets, and distributes fresh and fresh-cut fruit and vegetables worldwide. Market cap at $1.48B, most recent closing price at $25.58. Click to view Zack’s free Snapshot Report.
2. Home Loan Servicing Solutions, Ltd. (HLSS, Earnings, Analysts, Financials): A development-stage company. The Company is formed to acquire mortgage servicing assets, primarily subprime and Alt-A mortgage servicing rights and associated servicing advances. Market cap at $545.1M, most recent closing price at $19.16. Click to view Zack’s free Snapshot Report.
3. Michael Kors Holdings Ltd. (KORS, Earnings, Analysts, Financials): A designer, marketer, distributor and retailer of branded women’s apparel and accessories and men’s apparel. Market cap at $10.5B, most recent closing price at $54.49. Click to view Zack’s free Snapshot Report.
4. Stratasys Inc. (SSYS, Earnings, Analysts, Financials): Engages in the development, manufacture, and marketing of three dimensional (3D) printing, rapid prototyping (RP), and direct digital manufacturing (DDM) systems primarily in North America, Europe, and the Asia Pacific. Market cap at $1.46B, most recent closing price at $68.32. Click to view Zack’s free Analyst Report .
5. The Travelers Companies, Inc. (TRV, Earnings, Analysts, Financials): Provides various commercial and personal property and casualty insurance products and services to businesses, government units, associations, and individuals primarily in the United States. Market cap at $27.3B, most recent closing price at $71.56. Click to view Zack’s free Analyst Report .
Get the rest of the stocks on this list and sign up for your free trial of the Research Wizard. Start using this idea in your own screens and start putting your own ideas to the test. It’s easy to do and you’ll be on your way to picking better stocks immediately.
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Disclosure: Officers, directors and/or employees of Zacks Investment Research may own or have sold short securities and/or hold long and/or short positions in options that are mentioned in this material. An affiliated investment advisory firm may own or have sold short securities and/or hold long and/or short positions in options that are mentioned in this material.
Disclosure: Performance information for Zacks’ portfolios and strategies are available at: http://www.zacks.com/performance.
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