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The second-quarter earnings season is underway amid sky-high stock prices and extremely upbeat expectations. Estimates for second-quarter earnings have risen steadily for the past six months (per a CNBC article), from the expected 45% growth in January to 65% growth currently compared with the same period last year. It’s the strongest rate of growth since 2009 after the horrible spell of the Great Recession.
Though such upbeat estimates are arising out of easy comparison, positive earnings surprise prior to the earnings release of a company is very important. More than the comparison with previous results, it is an earnings beat which drives the market post release.
Why Is Earnings Surprise So Important?
Historically, stocks of companies with solid quarterly earnings (on a nominal basis) fall if they miss or just come in line with market expectations. After all, a 20% earnings rise (though it looks good apparently) doesn’t tell you if earnings growth has been exhibiting a decelerating trend. If that is the case, the company’s fundamentals are in serious question.
There is also the factor of seasonal fluctuation. If a company’s Q1 is seasonally weak and Q4 is strong, then it is likely to report a sequential earnings decline. In a such case, growth rates are ambiguous while judging the company’s true health.
On the other hand, Wall Street analysts study companies’ financials and initiatives to forecast earnings. They in fact club their insights and the company’s guidance to derive an earnings estimate. So, outperforming that estimate is almost equivalent to beating the company’s own expectation as well as market perception. And if the company manages to surpass earnings by a wide margin, it typically drives the stock higher right after the release.
Now, since it is hard to predict if a company will beat or miss in the upcoming earnings season, investors can check its earnings surprise history. A notable track record generally acts as a tailwind. It revs up chances of beating estimates in the next release too as investors expect the company to use the same old trick to come ahead of expectations, or is smart enough to pull off a beat in the next release.
The Winning Strategy
In order to shortlist stocks that are likely to come up with an earnings surprise, we chose the followingas our primary screening parameters.
Last EPS Surprise greater than or equal to 10%:Stocks that delivered a positive surprise in the last quarter are likely to surprise again.
Average EPS Surprise in the last four quarters greater than 20%:We lifted the bar for outperformance slight higher by setting the average earnings surprise for the last four quarters at 20%.
Average EPS Surprise in the last two quarters greater than 20%:This points to a more consistent surprise history and makes the case for another surprise even stronger.
In addition, we place a few other criteria that push up the chance of a positive surprise.
Zacks Rank less than equal to 2:Only companies with a Zacks Rank #1 (Strong Buy) or 2 (Buy) rating can get through.
Earnings ESPgreater than zero: A stock needs to have both a positive Earnings ESP and a Zacks Rank of #1, 2 or 3 for an earnings beat to happen, as per our proven model.
In order to zero in on those that have long-term growth potential and high trading liquidity we have added the following parameters too:
Next 3–5 Years Estimated EPS Growth (Per Year) greater than 10%:Solid expected earnings growth exhibits the stock’s long-term growth prospects.
Average 20-day Volume greater than 100,000: High trading volume implies that the stock has adequate liquidity.
A handful of criteria narrowed down the universe from over 7,700 stocks to 30.
Here are five out of the 30 stocks:
PVH Corp. (PVH - Free Report) :This Zacks Rank #1company specializes in designing and marketing branded dress shirts, neckwear, sportswear, jeanswear, intimate apparel, swim products, footwear, handbags and related products.You can see the complete list of today’s Zacks #1 Rank stocks here.
BJs Restaurants Inc. (BJRI - Free Report) : This Zacks Rank #2 restaurant company owns and operates a chain of high-end casual dining restaurants in the United States.
Ulta Beauty Inc. (ULTA - Free Report) : It is a leading beauty retailer in the United States, with a Zacks Rank #1.
Apple Inc. (AAPL - Free Report) : This Zacks Rank #2 companyprimarily runs around its flagship iPhone. However, the Services portfolio that includes revenues from cloud services, App store, Apple Music, AppleCare, Apple Pay, and licensing and other services, has now become the cash cow.
Magna International Inc. (MGA - Free Report) : This is a manufacturer and supplier of complete automotive components. The company carries a Zacks Rank #2.
You can get the rest of the stocks on this list by signing up now for your 2-week free trial to the Research Wizard and start using this screen in your own trading. Further, you can also create your own strategies and test them first before taking the investment plunge.
The Research Wizard is a great place to begin. It's easy to use. Everything is in plain language. And it's very intuitive. Start your Research Wizard trial today. And the next time you read an economic report, open up the Research Wizard, plug your finds in, and see what gems come out.
Disclosure: Officers, directors and/or employees of Zacks Investment Research may own or have sold short securities and/or hold long and/or short positions in options that are mentioned in this material. An affiliated investment advisory firm may own or have sold short securities and/or hold long and/or short positions in options that are mentioned in this material.
Image: Bigstock
5 Top-Ranked Stocks Up for an Earnings Beat
The second-quarter earnings season is underway amid sky-high stock prices and extremely upbeat expectations. Estimates for second-quarter earnings have risen steadily for the past six months (per a CNBC article), from the expected 45% growth in January to 65% growth currently compared with the same period last year. It’s the strongest rate of growth since 2009 after the horrible spell of the Great Recession.
Though such upbeat estimates are arising out of easy comparison, positive earnings surprise prior to the earnings release of a company is very important. More than the comparison with previous results, it is an earnings beat which drives the market post release.
Why Is Earnings Surprise So Important?
Historically, stocks of companies with solid quarterly earnings (on a nominal basis) fall if they miss or just come in line with market expectations. After all, a 20% earnings rise (though it looks good apparently) doesn’t tell you if earnings growth has been exhibiting a decelerating trend. If that is the case, the company’s fundamentals are in serious question.
There is also the factor of seasonal fluctuation. If a company’s Q1 is seasonally weak and Q4 is strong, then it is likely to report a sequential earnings decline. In a such case, growth rates are ambiguous while judging the company’s true health.
On the other hand, Wall Street analysts study companies’ financials and initiatives to forecast earnings. They in fact club their insights and the company’s guidance to derive an earnings estimate. So, outperforming that estimate is almost equivalent to beating the company’s own expectation as well as market perception. And if the company manages to surpass earnings by a wide margin, it typically drives the stock higher right after the release.
Now, since it is hard to predict if a company will beat or miss in the upcoming earnings season, investors can check its earnings surprise history. A notable track record generally acts as a tailwind. It revs up chances of beating estimates in the next release too as investors expect the company to use the same old trick to come ahead of expectations, or is smart enough to pull off a beat in the next release.
The Winning Strategy
In order to shortlist stocks that are likely to come up with an earnings surprise, we chose the followingas our primary screening parameters.
Last EPS Surprise greater than or equal to 10%:Stocks that delivered a positive surprise in the last quarter are likely to surprise again.
Average EPS Surprise in the last four quarters greater than 20%:We lifted the bar for outperformance slight higher by setting the average earnings surprise for the last four quarters at 20%.
Average EPS Surprise in the last two quarters greater than 20%:This points to a more consistent surprise history and makes the case for another surprise even stronger.
In addition, we place a few other criteria that push up the chance of a positive surprise.
Zacks Rank less than equal to 2:Only companies with a Zacks Rank #1 (Strong Buy) or 2 (Buy) rating can get through.
Earnings ESP greater than zero: A stock needs to have both a positive Earnings ESP and a Zacks Rank of #1, 2 or 3 for an earnings beat to happen, as per our proven model.
In order to zero in on those that have long-term growth potential and high trading liquidity we have added the following parameters too:
Next 3–5 Years Estimated EPS Growth (Per Year) greater than 10%:Solid expected earnings growth exhibits the stock’s long-term growth prospects.
Average 20-day Volume greater than 100,000: High trading volume implies that the stock has adequate liquidity.
A handful of criteria narrowed down the universe from over 7,700 stocks to 30.
Here are five out of the 30 stocks:
PVH Corp. (PVH - Free Report) :This Zacks Rank #1company specializes in designing and marketing branded dress shirts, neckwear, sportswear, jeanswear, intimate apparel, swim products, footwear, handbags and related products.You can see the complete list of today’s Zacks #1 Rank stocks here.
BJs Restaurants Inc. (BJRI - Free Report) : This Zacks Rank #2 restaurant company owns and operates a chain of high-end casual dining restaurants in the United States.
Ulta Beauty Inc. (ULTA - Free Report) : It is a leading beauty retailer in the United States, with a Zacks Rank #1.
Apple Inc. (AAPL - Free Report) : This Zacks Rank #2 companyprimarily runs around its flagship iPhone. However, the Services portfolio that includes revenues from cloud services, App store, Apple Music, AppleCare, Apple Pay, and licensing and other services, has now become the cash cow.
Magna International Inc. (MGA - Free Report) : This is a manufacturer and supplier of complete automotive components. The company carries a Zacks Rank #2.
You can get the rest of the stocks on this list by signing up now for your 2-week free trial to the Research Wizard and start using this screen in your own trading. Further, you can also create your own strategies and test them first before taking the investment plunge.
The Research Wizard is a great place to begin. It's easy to use. Everything is in plain language. And it's very intuitive. Start your Research Wizard trial today. And the next time you read an economic report, open up the Research Wizard, plug your finds in, and see what gems come out.
Click here to sign up for a free trial to the Research Wizard today.
Disclosure: Officers, directors and/or employees of Zacks Investment Research may own or have sold short securities and/or hold long and/or short positions in options that are mentioned in this material. An affiliated investment advisory firm may own or have sold short securities and/or hold long and/or short positions in options that are mentioned in this material.
Disclosure: Performance information for Zacks’ portfolios and strategies are available at: https://www.zacks.com/performance.