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What pushes up or pulls down shares when a company reports earnings? It’s not exactly how well a company performed in the recently concluded quarter or exhibited strong growth; it is an earnings beat or miss which drives the market post release.
What is Earnings Beat?
Investors always try to prepare themselves ahead of time and look for stocks that are likely to come up with a stellar performance. After much brainstorming, Wall Street analysts project earnings of companies. These estimates act as investment leads.
A positive earnings surprise or an 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.
Why Is Positive Earnings Surprise So Important?
Historically, stocks of companies with solid quarterly earnings (on a nominal basis) tank if they miss or merely meet market expectations. After all, a 20% earnings rise (though apparently looks good) doesn’t tell you if this growth has been exhibiting a decelerating trend.
Also, seasonal fluctuations come into the play sometimes. If any 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.
On the other hand, after much brainstorming and analysis of companies’ financials and initiatives, Wall Street analysts project earnings of companies. They in fact put together their insights and a company’s guidance when deriving an earnings estimate.
Thus, outperforming that estimate is almost equivalent to beating the company’s own expectation as well as the market perception. And if the margin of earnings surprise is big, it typically drives the stock higher right after the release. Thus, more than anything else, an earnings surprise can push a stock higher.
How to Find Stocks that Can Beat?
Now, finding stocks that have the potential to beat on the bottom line is not an easy task. One way to do this is to look at the earnings surprise history of the company. An impressive track in this regard generally acts as a catalyst in sending a stock higher. Earnings surprise history indicates the company’s consistency in beating market estimates. And investors also normally have confidence in such companies and expect them to apply the same secret sauce to execute yet another earning beat in its 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 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 EPS 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 surprise.
Zacks Rank equal to 1: Only companies with a Strong 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 around 10.
Here are five out of the 10 stocks:
SodaStream International Ltd. : This is a manufacturer of home beverage carbonation systems. The Zacks Industry Rank of the stock is in the top 8%, at the time of writing.
The Children's Place Inc. (PLCE - Free Report) : This is a specialty retailer of apparel and accessories for children with the Zacks Industry Rank in the top 36%.
Quidel Corp. (QDEL - Free Report) : The company manufactures and markets point-of-care, rapid diagnostic tests for detection of medical conditions and illnesses. The Zacks Industry Rank of the stock is in the top 36%.
MKS Instruments Inc. (MKSI - Free Report) : The company is the manufacturer and supplier of instruments, used in semiconductor and similar industrial manufacturing processes. The Zacks Industry Rank of the stock is in the top 8%.
Anika Therapeutics Inc. (ANIK - Free Report) : This company is into the manufacturing and commercialization of therapeutic products. The Zacks Industry Rank of the stock is in the top 31%.
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.
Zacks Restaurant Recommendations: In addition to dining at these special places, you can feast on their stock shares. A Zacks Special Report spotlights 5 recent IPOs to watch plus 2 stocks that offer immediate promise in a booming sector. Download it free »
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Get Nice Earnings Surprise With These 5 Stocks
What pushes up or pulls down shares when a company reports earnings? It’s not exactly how well a company performed in the recently concluded quarter or exhibited strong growth; it is an earnings beat or miss which drives the market post release.
What is Earnings Beat?
Investors always try to prepare themselves ahead of time and look for stocks that are likely to come up with a stellar performance. After much brainstorming, Wall Street analysts project earnings of companies. These estimates act as investment leads.
A positive earnings surprise or an 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.
Why Is Positive Earnings Surprise So Important?
Historically, stocks of companies with solid quarterly earnings (on a nominal basis) tank if they miss or merely meet market expectations. After all, a 20% earnings rise (though apparently looks good) doesn’t tell you if this growth has been exhibiting a decelerating trend.
Also, seasonal fluctuations come into the play sometimes. If any 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.
On the other hand, after much brainstorming and analysis of companies’ financials and initiatives, Wall Street analysts project earnings of companies. They in fact put together their insights and a company’s guidance when deriving an earnings estimate.
Thus, outperforming that estimate is almost equivalent to beating the company’s own expectation as well as the market perception. And if the margin of earnings surprise is big, it typically drives the stock higher right after the release. Thus, more than anything else, an earnings surprise can push a stock higher.
How to Find Stocks that Can Beat?
Now, finding stocks that have the potential to beat on the bottom line is not an easy task. One way to do this is to look at the earnings surprise history of the company. An impressive track in this regard generally acts as a catalyst in sending a stock higher. Earnings surprise history indicates the company’s consistency in beating market estimates. And investors also normally have confidence in such companies and expect them to apply the same secret sauce to execute yet another earning beat in its 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 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 EPS 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 surprise.
Zacks Rank equal to 1: Only companies with a Strong 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 around 10.
Here are five out of the 10 stocks:
SodaStream International Ltd. : This is a manufacturer of home beverage carbonation systems. The Zacks Industry Rank of the stock is in the top 8%, at the time of writing.
The Children's Place Inc. (PLCE - Free Report) : This is a specialty retailer of apparel and accessories for children with the Zacks Industry Rank in the top 36%.
Quidel Corp. (QDEL - Free Report) : The company manufactures and markets point-of-care, rapid diagnostic tests for detection of medical conditions and illnesses. The Zacks Industry Rank of the stock is in the top 36%.
MKS Instruments Inc. (MKSI - Free Report) : The company is the manufacturer and supplier of instruments, used in semiconductor and similar industrial manufacturing processes. The Zacks Industry Rank of the stock is in the top 8%.
Anika Therapeutics Inc. (ANIK - Free Report) : This company is into the manufacturing and commercialization of therapeutic products. The Zacks Industry Rank of the stock is in the top 31%.
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: http://www.zacks.com/performance
Zacks Restaurant Recommendations: In addition to dining at these special places, you can feast on their stock shares. A Zacks Special Report spotlights 5 recent IPOs to watch plus 2 stocks that offer immediate promise in a booming sector. Download it free »