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Q2 earnings season has officially begun and is well on its way with about 40
S&P 500 companies reporting.
By late last week, 29 of S&P 500
members had reported results and maintained the market’s mixed picture which is
similar to we saw in Q1. Earnings and revenue growth for these 29 companies are
comparable to what these same companies achieved in Q1 2013, but the beat
ratios (% of companies coming out with positive surprises) are modestly weaker
on the earnings side and about the same on the revenue side.
Over the last couple days, financials
stole the show and have really stood out as the big winners giving the equity market
a boost. Earnings from the likes of J.P.
Morgan (JPM - Analyst Report), Wells Fargo (WFC - Analyst Report) (both big winners mentioned in last
week’s ESP article), Citigroup C and Goldman’s (GS - Analyst Report) blowout report today are adding some bullish
fuel to the fire.
Bernanke is on deck with his house testimony
beginning tomorrow as well as earnings from Bank of America, PNC Bank, Intel, IBM
Corp., eBay and many more.
Stocks are going to have a ton to digest
in the coming weeks, volatility is sure to remain elevated so make sure you’re
As we continue our search for stocks that
have a high likelihood of beating estimates, the Zacks Earnings ESP can be an
invaluable tool in your search. Here are a few companies that look
promising next week:
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
Rambus Inc ((RMBS - Snapshot Report)) is a
Zacks Rank #1 stock with a positive earnings ESP of 9.09% for the current
quarter. The company is expected to lose 11 cents a share, but our ESP
readings are looking for a smaller loss of 10 cents.
Rambus recently won back an important patent
dispute in appeals court. On that news,
shares have nearly doubled. Rambus is
expected to continue to turn its business around and move back into the black
There is no doubt that this is a higher risk
stock with its recent rally and spotty financials. But if Rambus can not only beat this quarter,
but offer some strong guidance for the future, shares could march higher.
– Rambus reports earnings on July 18th
Capital One Financial ((COF - Analyst Report)) is a
Zacks Rank #2 stock with a positive earnings ESP of 1.2% for the current
quarter; the Zacks Consensus is for a per share profit of $1.72, with the most
accurate at $1.74.
What’s in your wallet?
Investors are thinking that there’s a wad
of cash in Capital One’s apparently; at least relatively speaking.
Despite a small rise in delinquency rates
on loans held at COF, analysts on average are bullish going into the report and
have been moving their estimates higher over the last 2 months.
Financials have been a bright spot in
this otherwise drab earnings season and hopefully we will see the same from
COF, although risks may be a slightly elevated, it still trades at just 10
times forward earnings; well within the sector’s average range.
– Capital One reports earnings on July 18th
American Electric Power ((AEP - Analyst Report)) is a Zacks Rank #3
stock with a positive earnings ESP of 5.00% for the current quarter. The
Zacks Consensus Estimate is for a profit of $0.80 this quarter and the most
accurate consensus comes in at a profit of $0.84.
American Electric Power is a public utility
holding company that throws off a modest dividend yield of 4.15%. Substantially all of the operating revenues of
AEP and its subsidiaries are derived from the furnishing of electric service.
Coming into the report, shares are
trading at 14.76 times forward earnings; analysts are looking for 3.56% in
earnings growth on a 1.5% increase in revenue in 2013. AEP rallied last quarter on a very similar
earnings expectation. This time around, valuations and stock price seem even
– AEP reports earnings on July 19th
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.
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% return.
apply the Zacks Rank of 1, 2 or 3 to that list and the returns jump to 28.3%.
you require your stocks to have an ESP of greater than 1%, we found it
increased 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
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 watch list 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 surprise.
If you prefer to let someone else do all the work
and have the best candidates and trades sent directly to your inbox, learn more
A Levy is one of the most highly sought after traders in the world and a former
member of three major stock exchanges. That is why you will frequently see him
appear on Fox Business, CNBC and Bloomberg providing his timely insights to
other investors. He has written and published two tomes, “Your
Options Handbook” and “The
Bloomberg Visual Guide to Options”. You can discover more of his
insights and recommendations through his two portfolio recommendation services:
Jared A Levy on twitter @jaredalevy
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