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Gone are the days when investors were content with just earnings growth. Now, higher earnings (irrespective of the magnitude) seem inadequate for solid moves in stock prices. It is the “beat” that matters the most.
Why Should You Prioritize Earnings Beat?
A positive earnings surprise or earnings beat is typically the case when actual or reported earnings come in above the consensus estimate. Historically, if a company’s earnings manage to beat market expectations, its stock surges post release.
This is because investors always try to take positions ahead of time and look for stocks that are likely to come up with a stellar performance. Now, since Wall Street analysts project earnings of companies after much deliberation, their estimates act as investment leads.
After all, only earnings beat can give investors a clear picture of a company’s strength when an industry-wide earnings recession is felt. A 20% earnings rise (though apparently looks good) doesn’t tell you everything about the company’s performance. This might represent a decelerating earnings growth momentum over the years or quarters, raising questions over the company’s fundamentals.
Also, seasonal fluctuations come into play at times. If a company’s Q1 is seasonally weak and Q4 is strong, then it is likely to report a sequential earnings decline. In such cases, growth rates are misleading while judging the true health of a company.
How to Locate Potential Outperformers?
Investors tend to look for stocks that have the potential to beat on the bottom line but might not always succeed. One way of identifying the winners beforehand is by looking at the earnings surprise history of a company.
An impressive track record in this regard generally acts as a driver. It indicates the company’s ability to exceed estimates. Investors generally believe that the company will have the same trick up its sleeve to deliver yet another earning beat in its upcoming release.
The Winning Strategy
In order to shortlist stocks that are likely to come up with an earnings surprise, we chose the following as our primary screening parameters.
Last EPS Surprise greater than or equal to 10%: Stocks delivering positive surprise in the last quarter tend 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 or 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 stocks have adequate liquidity.
A handful of criteria has narrowed down the universe from over 7,700 stocks to 25.
Here are five out of 25 stocks that passed the screen:
Boyd Gaming Corporation (BYD - Free Report) : This is a multi-jurisdictional gaming company. It has a Zacks Rank #1.
Jack In The Box Inc. (JACK - Free Report) : The Zacks Rank #2 company operates and franchises through Jack in the Box quick-service restaurants, and is one of the nation’s largest hamburger chains.
Columbus McKinnon Corporation (CMCO - Free Report) : This is a broad-line designer, manufacturer and supplier of sophisticated material handling products and integrated material handling solutions that are widely distributed to industrial and consumer markets worldwide. It has a Zacks Rank #1.
Apple Inc. (AAPL - Free Report) : This is Zacks Rank #2 company’s business primarily runs around its flagship iPhone.
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
Get Earnings Surprise From 5 Top Stocks
Gone are the days when investors were content with just earnings growth. Now, higher earnings (irrespective of the magnitude) seem inadequate for solid moves in stock prices. It is the “beat” that matters the most.
Why Should You Prioritize Earnings Beat?
A positive earnings surprise or earnings beat is typically the case when actual or reported earnings come in above the consensus estimate. Historically, if a company’s earnings manage to beat market expectations, its stock surges post release.
This is because investors always try to take positions ahead of time and look for stocks that are likely to come up with a stellar performance. Now, since Wall Street analysts project earnings of companies after much deliberation, their estimates act as investment leads.
After all, only earnings beat can give investors a clear picture of a company’s strength when an industry-wide earnings recession is felt. A 20% earnings rise (though apparently looks good) doesn’t tell you everything about the company’s performance. This might represent a decelerating earnings growth momentum over the years or quarters, raising questions over the company’s fundamentals.
Also, seasonal fluctuations come into play at times. If a company’s Q1 is seasonally weak and Q4 is strong, then it is likely to report a sequential earnings decline. In such cases, growth rates are misleading while judging the true health of a company.
How to Locate Potential Outperformers?
Investors tend to look for stocks that have the potential to beat on the bottom line but might not always succeed. One way of identifying the winners beforehand is by looking at the earnings surprise history of a company.
An impressive track record in this regard generally acts as a driver. It indicates the company’s ability to exceed estimates. Investors generally believe that the company will have the same trick up its sleeve to deliver yet another earning beat in its upcoming release.
The Winning Strategy
In order to shortlist stocks that are likely to come up with an earnings surprise, we chose the following as our primary screening parameters.
Last EPS Surprise greater than or equal to 10%: Stocks delivering positive surprise in the last quarter tend 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 or 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 stocks have adequate liquidity.
A handful of criteria has narrowed down the universe from over 7,700 stocks to 25.
Here are five out of 25 stocks that passed the screen:
Carters Inc. (CRI - Free Report) :The Zacks Rank #2 company is the largest marketer of branded apparel and related products for babies, and young children in North America. You can see the complete list of today’s Zacks #1 Rank stocks here.
Boyd Gaming Corporation (BYD - Free Report) : This is a multi-jurisdictional gaming company. It has a Zacks Rank #1.
Jack In The Box Inc. (JACK - Free Report) : The Zacks Rank #2 company operates and franchises through Jack in the Box quick-service restaurants, and is one of the nation’s largest hamburger chains.
Columbus McKinnon Corporation (CMCO - Free Report) : This is a broad-line designer, manufacturer and supplier of sophisticated material handling products and integrated material handling solutions that are widely distributed to industrial and consumer markets worldwide. It has a Zacks Rank #1.
Apple Inc. (AAPL - Free Report) : This is Zacks Rank #2 company’s business primarily runs around its flagship iPhone.
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.