UBS tips these 2017 underperformers to bounce back

Companies who have downgraded their earnings outlook are rightly punished but there are five stocks among the earnings sinners who may find redemption in 2018.

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Our market looks poised to exit the year on the front foot with the S&P/ASX 200 (Index:^AXJO) (ASX:XJO) up around 6% so far this calendar year, and that doesn't include dividends or franking credits.

But as my colleague James Middleweek pointed out, you could have performed so much better if you picked the right stocks as opposed to investing in the index.

Stock picking will continue to be a vital tool if you are looking to outperform over the next 12 months, and that means knowing what to keep your eye on as we close out 2017.

The thing is, 2018 probably won't be a big year for earnings growth. Analysts have barely moved their modest forecasts following the annual general meeting (AGM) season where companies typically provide updates on earnings expectations.

Those who have upgraded expectations have unsurprisingly run ahead of the market and we can add names like gaming machine maker Aristocrat Leisure Limited (ASX: ALL), investment bank Macquarie Group Ltd (ASX: MQG) and our flying kangaroo Qantas Airways Limited (ASX: QAN) to this list.

There's no doubt that several of these "upgraders" will keep doing well and I am personally bullish on Macquarie Group for 2018.

However, if you were looking among the out-of-favour "down-graders" for those with a come-back potential, UBS has a couple of tips for you.

The broker notes that there were 34 of these underachievers that have been cast into the sin bin. These are stocks that have suffered a 3% or more earnings per share downgrade to generally lag the market.

There are exceptions such as ports and logistics company Qube Holdings Ltd (ASX: QUB) and Crown Resorts Ltd (ASX: CWN), which suffered pretty substantial downgrades but defied the downtrend. However, that's for another article.

Of these earnings sinners, there are five where UBS sees value and a reasonably attractive risk-return outlook.

These stocks include logistics group Brambles Limited (ASX: BXB), QBE Insurance Group Ltd (ASX: QBE), international mall operator Westfield Corp Ltd (ASX: WFD), casino operator Star Entertainment Group Ltd (ASX: SGR) and property developer Lendlease Group (ASX: LLC).

There is also another group that looks well placed to run ahead of the pack in 2018. Click on the link below to claim your free report from the experts at the Motley Fool on the stocks worth watching for the year ahead.

Motley Fool contributor Brendon Lau owns shares of Lend Lease Group and Macquarie Group Limited. The Motley Fool Australia owns shares of Crown Resorts Limited. We Fools may not all hold the same opinions, but we all believe that considering a diverse range of insights makes us better investors. The Motley Fool has a disclosure policy. This article contains general investment advice only (under AFSL 400691). Authorised by Bruce Jackson.

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