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Investment Ideas

A rising tide lifted nearly all boats last year. Most stocks - almost independent of their own fundamentals - soared right along with the overall market in 2013.

But investors can no longer simply throw darts and expect big gains.

Considering that equities no longer look cheap as an asset class, this could quickly become a stock picker's market. In this environment, there will be clear cut winners and losers as the market evaluates the merits of each stock. And there is just no bigger judgment day for stocks than when they report quarterly earnings.

With second quarter earnings season kicking into gear, the time to pay attention is now.

More . . .


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No More Earnings Surprises?

Imagine if you knew, with 77.32% certainty, a handful of exceptional stocks that would rack up positive earnings surprises – 1 to 5 days BEFORE their reports are released. They wouldn't be surprising to you. There would be no need to wait until the post-report price pops are already underway.

This predictive accuracy was the seemingly unattainable "Holy Grail" for investors. Yet a Zacks research breakthrough has achieved it. Today you can line up to see the first stocks from a powerful new "surprise" strategy. Notice: Entry is limited and closes Saturday, July 19.

Get details now >>

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From a 'Raging' to an 'Aging' Bull Market

The dispersion of returns within the S&P 500 was near historic lows in 2013 as the market soared. This means that the average difference between the return of the overall S&P 500 and its components was very low. In other words, the rising tide of the market essentially lifted all boats.



This high degree of correlation is understandable when equities appear undervalued as an entire asset class. But by nearly every valuation metric, the market no longer looks cheap. And considering the nearly +200% return for the S&P since March 2009, this should come as no surprise.

In fact, even the Fed is warning now of stretched valuations in some industries.

Let's face it, most of the easy money has been made as we have gone from a 'raging' bull market to an 'aging' bull market.


Quarterly Earnings = Judgment Day for Stocks

Like it or not, quarterly earnings is often 'judgment day' for many stocks. And given the age of this bull market and where valuations are, don't expect the market to shrug off weak earnings reports anymore. Investors are going to reward those companies that beat expectations and punish those who don't. Not even the best companies are immune from posting negative surprises and seeing their stock drop.

But what if there was a way to gain a significant (and legal) edge before a company reports earnings?

Our Earnings ESP (Expected Surprise Prediction) system here at Zacks is our proprietary methodology for determining which stocks have the best chance to surprise with their next earnings announcement. This method predicts earnings surprises with 70% accuracy.

When a positive ESP is coupled with a Zacks Rank of #1-3, the result is market-crushing returns. Over a 10-year period ending in May 2012 and using a one-week holding period, the average annual return of such a strategy would have delivered gains of more than +28% per year.

Additionally, the higher the Earnings ESP, the greater the average returns. For Zacks Rank #1-3 stocks with an ESP greater than 3% (meaning the Most Accurate Estimate was at least 3% above the Zacks Consensus Estimate), the average annual returns were an eye-popping +37.2%.

Conversely, stocks with a negative Earnings ESP produced a dismal -9.2% average annual return.

With second quarter earnings season kicking into gear, judgment day is likely coming for many stocks in your portfolio. Make sure your stocks are safe by watching their Earnings ESP.


New Approach to Earnings Season Profits

Let's take this a step further. In addition to running a safety check on your current stocks, what if you could find a handful of new ones with exceptional short-term profit potential?

What if you were tipped off to them 1-5 days BEFORE their earnings reports – with previously unthinkable accuracy of 77.32%? A Zacks research breakthrough now makes that possible, and drives our new Zacks Surprise Trader.

We can't share all the details of the formula with you, but this new system relies on two under-used criteria coming from the brokerage analyst community. These two factors are then layered on top of other time-tested elements such as the Zacks Rank and Zacks Industry Rank to find only a handful of the best stocks in the best industries.

I am getting ready to release the very first stocks from this strategy, and you can be among the first to jump on them before the earnings reports are made public. But don't delay. We can't let too many share these recommendations, and must close the door to new investors this Saturday, July 19.

Learn more about the Zacks Surprise Trader >>

Good Trading,

Todd Bunton

Zacks Stock Strategist Todd Bunton, CFA directs the new Zacks Surprise Trader.

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