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Earnings ESP

With the House and Senate finally coming to an agreement regarding the Debt ceiling, focus has been shifted towards the implementation of the Affordable Health Care Act.  There have been massive failures with the roll out of the program, which has many people worried that the health care legislation might be delayed, or fold under its own weight.  This has caused us at Zacks to take a close look at the Insurance Industry.

As earnings are underway, we wanted to look at which Insurance companies are best positioned to receive a strong boost once earnings are announced.  To do this, we turn to our proprietary methodology, the Zacks Earnings Surprise Prediction (ESP). 

Overall Look of the S&P 500 companies that have reported so far

At the end of the second quarter, many companies began to reduce both earnings and revenue guidance, creating very low expectations for the third quarter’s earnings season.  As of the close of the bell on Friday, 99 of the S&P 500 companies have reported earnings.  Due to the reduction in guidance, 62.6% of the companies (out of the 99) have beat earnings expectations, while only 43.5% (of the 99 who have filed) have beat on revenues.  This decline in expectations is creating an increased probability that companies will beat earnings, and thusly see a boost in value post earnings announcements.

How do I narrow down my options?

How do I know which sector, and more importantly what specific stock is poised for a strong positive earnings surprise?  Zacks combines their ESP (Earnings Surprise Prediction), and Zacks Rank (see Zacks Earnings ESP: A better way to Find Earnings Surprises).  This combination is a one stop shop to increasing your odds at identifying companies that will post a positive earnings surprise.   

The combination of Zacks ESP and Zacks Rank indicated that the Insurance sector is projecting high levels of positive earnings surprises.  According to the Zacks ESP, there are 13 Insurance companies that will beat earnings expectations next week alone.  Below are three Insurance stocks Zacks believes will be big winners when they post earnings next week.   

Bullish ESP for the Insurance Sector

Everest Re Ltd is a Zacks Rank #2 (Buy) stock with a positive earnings ESP of 9.7%; the Zacks consensus estimate is for Q3 EPS of $4.33.  Everest Re boasts of a superior risk-adjusted capital position, long-term record of producing favorable earnings, stable cash flows, and an experienced management team with a market profile as a leading global provider of insurance and reinsurance products.

-Everest Re Ltd report earnings on October 23

Stancorp Financial Group Inc. is a Zacks Rank #1 (Strong Buy) stock with a positive earnings ESP of 6.8%; the Zacks consensus estimate is for Q3 EPS of $1.03.  This company has seen a decline in operating expenses, more favorable claims experience in the group long-term Disability Insurance business, and higher earnings in the company’s Asset Management business.  Moreover, SFG has posted a positive earnings surprise for the last four consecutive quarters with an average positive surprise of 31.46%.

-Stancorp Financial Group report earnings on October 22

Allied World Assurance Co Holdings is a Zacks Rank #1 (Strong Buy) stock with a positive earnings ESP of 12.12%; the Zacks consensus estimate is for Q3 EPS of $1.98.  This company has reasonable debt levels, strong cash flows from operations, and solid stock performance.  Moreover, AWH has posted a solid positive earnings surprise for the past three consecutive quarters, with an average positive surprise of 31.22%.  In the past 60 days, analysts estimates (on average) have jumped from an expected EPS of $1.37 to $1.98 (with the highest being $2.60). 

-Allied World Assurance Co reports earnings on October 23

Bottom Line

Even with the uncertainty of the Affordable Health Care Act, and its implementation, Insurance companies are positioned to not only to survive, but to beat current expectations. 
To learn more about Zacks ESP, please click here.  

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