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Earnings Gappers: 3 Stocks Set to Build off Strong EPS

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Over the long run, earnings growth is the main driving force of stocks. All else being equal, higher earnings growth equates to higher stock prices. Though the previous statement is true, it is oversimplified. In the real world, investors face the task of making sense of incomplete information about the future and timing a purchase properly in the short term. To complicate things further, earnings are only released four times a year, resulting in one of the most volatile days of the year in most stocks. During earnings season, investors are faced with the reality of making decisions when binary risk is present. In other words, one wrong statement on an earnings call can result in massive losses.

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In just the past two years, Upstart Holdings (UPST - Free Report) suffered earnings gap downs of 18% and 56% in the session after earnings were reported.

Limiting Risk can be Essential to Investing Success

Some elite investors can find success by investing in stocks before earnings, especially if the stock they are trading has a positive Earnings Expected Surprise Prediction (ESP). A positive Zacks ESP score suggests a stock is likely to have a positive surprise on earnings.

Conversely, other investors find success by avoiding earnings entirely and minimizing the gap down risk. This style of investor may look to trade breakaway gaps. A breakaway gap occurs when stock gaps strongly higher on massive volume after a positive news announcement, such as better-than-anticipated earnings results.

Post Earnings Drift

Many of the market’s most prominent winners begin their price moves with breakaway gaps post-earnings and never look back. Looking back at historical winners such as First Solar (FSLR - Free Report) in July of 2022 provides proof. After announcing better-than-expected earnings, FSLR shares gapped higher by more than 15% to $88 as volume soared to levels four times the norm. By January of 2023, shares were trading north of $180.

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As growth investor William O’Neil points out, “What seems too high and risky to the majority generally goes higher, and what seems low and cheap generally goes lower.”

Today’s Market Environment has Potential

In 2022, the major U.S. indices were stuck in a debilitating bear market, offering little in the way of breakaway gap opportunities in the form of earnings surprises. However, the action thus far in 2023 is the polar opposite. Several stocks are reacting positively to earnings. Today we will cover 3 such stocks which you can add to your earnings gap watch list:

1.   Meta Platforms (META - Free Report) ,the parent company of Facebook, Whatsapp, and Instagram, is the dominant player in the social media arena. Year-to-date, the company’s fortunes are changing. In 2022, Meta saw heavy selling pressure amid the tech meltdown, CEO Mark Zuckerberg’s deeper focus on the metaverse (not its core business), and falling earnings estimates. Following earnings earlier this month, META shares bolted higher by 23% on massive volume after adding billions of dollars to its buyback program.

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The recent activity and news in the stock mark a true change of character. META has regained its 200-day moving average. Investors are more confident after the buyback announcement – betting that the increased demand and lower supply of shares will buoy the stock until earnings growth picks up again. META holds a Zacks #2 rank (Buy).

2.   When a company loses an iconic CEO it can mean trouble for the stock. For instance, when legendary General Electric (GE - Free Report) CEO Jack Welch retired in 2001, the stock was never the same – in fact, it has yet to reach its 2000 high. Another example is Jeff Bezos’s recent departure as Amazon (AMZN - Free Report) CEO. While World Wrestling Entertainment has performed well in recent months, shares got an even more significant boost when its CEO of 40 years Vince McMahon announced his return. January 6th, the day the news was announced, shares powered higher by 17% on gargantuan volume (10x the norm).

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Though net income declined year over year in the recent quarter, the company is laser-focused on expanding its reach across a wider array of platforms such as Peacock. The recent earnings miss was WWE’s first miss in fifteen quarters. Since the price gap, WWE shares have been consolidating constuctively. Expect this entertainment leader to wrestle its way back to growth in the coming quarters.

3.   Wednesday shares of software company New Relic rocketed 18% in volume seven times the average. Investors applauded the fact that for the second straight quarter, the company was able to swing to a profit. NEWR beat earnings estimates on both the top and bottom lines. Currently, the stock holds a Zacks #3 Rank (hold). Watch to see if the stock can digest gains at these levels and if earnings estimates rise in the coming days.

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Image Source: Zacks Investment Research

Recently, fellow software firm Qualtrics also flashed a breakaway gap after reporting earnings.

Takeaway

Unlike last year, the 2023 market is bearing fruit in the form of positive earnings reactions. Stocks like Meta, WWE, and New Relic fit the bill, but they are just some of the names gapping higher. Last night Disney (DIS - Free Report) gapped higher after releasing its earnings results. The company’s fortunes are turning around after CEO Bob Iger returned to the helm as CEO. Be sure to keep your earnings gap watch list fresh, as stocks like these will likely provide ample opportunity in the coming months.

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