As of yesterday, total
earnings for the 150 S&P 500 companies that had already reported Q4 results
were up +0.3% from the same period last year, with 63.3% of the companies
beating earnings expectations with a median surprise of +2.4%. Revenues are up
+4.9%, with a much stronger 62% of companies beating top-line expectations with
a median surprise of +0.6%.
There are still 350
companies left to report and if we apply similar expectation/beat
characteristics to those remaining companies, EPS growth would come up flat
year over year. Even with that, the S&P 500 index is up over 15% year over year. Earnings & revenue growth has been
on the decline in that time indicating a slowdown not acceleration.
But that’s not what the
market is seeing...
I do agree that the
S&P 500’s trailing P/E multiple of 17.50 is not terribly high if forward
expectations are for 13.3. But if
revenue growth is on the decline and it seems like the most likely scenario for
the U.S. is for growth to be flat and Europe to decline, where is the
justification for higher prices?
The answer will lie in
earnings alone; finding stocks with the greatest chances of beating estimates
is the best path to finding rising stock prices on earnings and the Zacks
Earnings Surprise Prediction or ESP helps target those stocks.
About Zacks Earnings ESP
Earnings ESP is Zacks’ proprietary methodology
for determining which stocks have the best chance to surprise with their next
earnings announcement. The Earnings ESP shows the percentage difference between
the Most Accurate Estimate and the Consensus. The Zacks ESP helps predict
earnings surprises to the upside and downside; the greater the ESP (positive or
negative) the greater the likelihood for a surprise. I use ESP to help quantify
the conviction of the analysts for a surprise and stack the odds in my favor
when I combine it with other measurements and statistics.
The Accuracy of ESP
Of course, some ESP numbers are better than others. In our testing,
over the last 10 years, we have found that stocks with a positive ESP and with
a Zacks Rank of 1, 2 or 3 (Strong Buy, Buy or Hold), produced a positive
surprise 70% of the time.
(The other 9% of the time, they reported in line with expectations,
with a negative surprise occurring only 21% of the time.)
Bullish ESP Stocks
Meritage Homes ((MTH - Snapshot Report)) is a Zacks Rank #1
stock with a positive earnings ESP of 4.27% for the current quarter. The company is expected to make 42 cents a
share, but our ESP readings are looking for a profit of 44 cents.
The housing sector remains resilient and earnings for Meritage’s
peers have been very strong as have their outlooks for the coming year. Interest rates are expected to remain low for
the next two years or so which should provoke more buyers to step up and buy.
Just today, the S&P Case-Shiller 20-city home price index
showed a annualized gain of 5.5%, the highest since 2006.
With a P/E of 20, MTH is still within the realm of value if growth
continues and trends remain strong.
– Meritage Homes reports earnings on January 31st.
Nationstar Mortgage Holdngs Inc ((NSM - Snapshot Report)) is a Zacks Rank #1
stock with a positive earnings ESP of 2% for the current quarter; the Zacks
Consensus is for a per share profit of $0.65.
Sticking with the strong housing theme, Nationstar is a premier
mortgage lender in the states with a portfolio worth over $425 bullion.
Nationastar recently partnered with KB Home to form Home Community
Mortgage, LLC, which will be used to provide mortgage services to KB Home
Nationstar has beat the Zacks Consensus four quarters in a row at
an average of 92% and is an aggressive lender in a space that is on the mend it
might be worth a look.
– Nationstar reports earnings on February 6th.
AutoNation (AN - Analyst Report) is a Zacks Rank #2 stock with a positive earnings ESP of 3.06%
for the current quarter. The Zacks consensus estimate is for Q4 EPS of
$0.65, with the most accurate estimate at $0.67.
AutoNation has come up just shy of analysts’ expectations last quarters,
but has shown steady earnings growth and is seeing bullish analyst activity ahead
of their report Thursday.
Trading at just 15 times forward earnings, the stock is relatively
cheap compared to others in the space and given the strength in consumer
spending in the last quarter, we should see good results from AN.
– AutoNation reports earnings on January 31st.
Using Zacks Earnings ESP
Now that you know which groups of stocks to focus on to increase your
chances of a positive surprise, let’s look at the size of the ESP that has
historically generated the best results.
First, just having a positive ESP produces market beating results.
Over the last 10 years, using a 1 week holding period (stocks were held for no
more than one week after they reported), the average annual return was 23.5%.
This is in stark contrast to stocks with a negative ESP which produced a -9.20%
Now apply the Zacks Rank of 1, 2 or 3 to that list and the returns
jump to 28.3%.
But requiring your stocks to have an ESP of greater than 1%, increases
its performance to 29.6%. An ESP of greater than 2%, bumps performance up to
31.6%. While an ESP of greater than 3%, produces an average annual return of
Note: there’s no need to hold out for stocks with significantly higher
ESP’s than 3%. While some stocks with higher ESP’s will do fantastic, there’s
no aggregate increase in performance by ratcheting it up beyond d the 3%
threshold. And as the above stats illustrate, simply having a positive ESP
(i.e., the Most Accurate Estimate is above the Consensus) still produces
stellar results with a high probability of success.
Using Zacks ESP in Your Own Trading Today
The next time your stock is about to report or a stock on your
watchlist is getting closer to their earnings date, be sure to look at its
Zacks ESP and see what your stock’s probabilities are of producing a positive
If you prefer to let someone else do all the work and have the
best candidate sent to your computer, learn more about Whisper Trader now