3 Steps to Prepare for Earnings Season

A good practice for investment success is to have regular review periods for your holdings. While some longer term buy-and-hold fund managers may not feel the need to do this but twice a year, it's a good habit to do it every quarter as company earnings are reported.

That way you can stay tuned in to what's driving your stocks' performance, since real corporate profits and analyst projections of future growth are the most powerful factors affecting stock prices. Here's a simple 3-step process to prepare for earnings season and all that it may offer you in terms of decision-making insight and opportunity.

ONE: Make 2 Portfolio Tracking Lists The first one should be for all current holdings and the second for stocks you are watching and considering as buy candidates. If you do this on Zacks.com, you'll have instant views of vital information like expected EPS for the quarter, the actual report date, growth estimates for the current year and next year, and the Zacks Rank which is based purely on recent trends in analyst earnings estimates.

TWO: Consider Selling Weak Stocks Because the Zacks Rank closely tracks the pulse of analyst earnings estimates for over 4,000 stocks every day, it can alert you to meaningful trends in earnings growth, or the lack of it. #4 Rank (sell) and #5 Rank (strong sell) stocks are in a downtrend of earnings estimate revisions and should not only be avoided, but placed on watch for an exit.

THREE: Review Growth Trends and Surprise History For stocks on your "watch to buy" list, take a good hard look at the projections for earnings growth to make sure you have this important edge in your favor. The primary reason that stocks with upward earnings momentum outperform the market and most other stocks is because institutional portfolio managers use analyst estimates in their valuation models to tell them what stocks are the most undervalued relative to that earnings picture.

If you had followed this process in the past year, you would have held on to strong stocks like Caterpillar (CAT - Analyst Report) and Apple (AAPL - Analyst Report) and sold weak names like Goldman Sachs (GS - Analyst Report) and Carnival (CCL - Analyst Report).

One of the strongest and most-surprising stock stories of the past year has been Travelzoo (TZOO - Snapshot Report), going from the mid-teens to $100 on the back of a consistent Zacks Rank of #1 (strong buy) or #2 (buy). Then again, if you followed the Zacks Ranks for this name, you were not surprised at all to watch it go up over 500%. Below is just one of the valuable snapshots of this earnings story available in our free data.

When you combine #1 or #2 Rank stocks with this analysis and with a stock's history of earnings surprises (also available under the Zacks Estimates tab), you can get a clear idea of what stocks are consistently delivering earnings growth that is exceeding expectations.

Remember, Wall Street analysts as a group tend to be conservative in their earnings estimates. So the companies that have a history of positive surprises are most likely to keep delivering the goods and these are the names that will be bought before and after their earnings reports.

Kevin Cook is a Senior Stock Strategist with Zacks.com