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All the suspense that builds up before the release of any company’s quarterly financial results pertains to whether its earnings will beat or miss the estimates. More than the comparison with previous results, it is a positive earnings surprise that drives a stock post earnings release.
Inside Earnings Surprise
A positive earnings surprise or earnings beat is typically the case when actual or reported earnings come in above the consensus estimate and vice versa. 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 everything about the company. Maybe this represents a decelerating earnings growth momentum, raising questions over the company’s fundamentals.
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.
Instead, after much brainstorming on a company’s financials and initiatives, Wall Street analysts project its earnings. They also consider a company’s guidance when deriving an earnings estimate.
Thus, outperforming that key 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 Out Those Gems?
Now, finding stocks that have the potential to beat on the bottom line is a pretty tough job. One way of tracking them down is by looking at the earnings surprise history of a company.
An impressive history in this regard generally acts as a driver in sending a stock higher. It indicates the company’s ability to exceed estimates consistently. And investors generally believe that the company will apply the same secret sauce 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 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 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.
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 10.
Here are five out of the 10 stocks:
The Chemours Company (CC - Free Report) : The company is into chemical business. The Zacks Industry Rank of the stock is in the top 22%.
Teck Resources Limited : The company is into mining and mineral development. The Zacks Industry Rank of the stock is in the top 16%.
Best Buy Co. Inc. (BBY - Free Report) : The company sells personal computers, consumer electronics, major appliances and related accessories mainly through its retail stores. The Zacks Industry Rank of the stock is in the top 26%.
Amazon.com Inc. (AMZN - Free Report) : It is one of the largest online retailers in the world with the Zacks Industry Rank within the top 17%.
Marinemax Inc. (HZO - Free Report) : The company is a recreational boat dealer in the U.S. Its industry rank is within the top 25%.
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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5 Top-Ranked Stocks with Earnings Beat Potential
All the suspense that builds up before the release of any company’s quarterly financial results pertains to whether its earnings will beat or miss the estimates. More than the comparison with previous results, it is a positive earnings surprise that drives a stock post earnings release.
Inside Earnings Surprise
A positive earnings surprise or earnings beat is typically the case when actual or reported earnings come in above the consensus estimate and vice versa. 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 everything about the company. Maybe this represents a decelerating earnings growth momentum, raising questions over the company’s fundamentals.
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.
Instead, after much brainstorming on a company’s financials and initiatives, Wall Street analysts project its earnings. They also consider a company’s guidance when deriving an earnings estimate.
Thus, outperforming that key 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 Out Those Gems?
Now, finding stocks that have the potential to beat on the bottom line is a pretty tough job. One way of tracking them down is by looking at the earnings surprise history of a company.
An impressive history in this regard generally acts as a driver in sending a stock higher. It indicates the company’s ability to exceed estimates consistently. And investors generally believe that the company will apply the same secret sauce 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 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 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 equal to 1: Only companies with a Zacks Rank #1 (Strong Buy) rating can get through. You can see the complete list of today’s Zacks #1 Rank stocks here.
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 10.
Here are five out of the 10 stocks:
The Chemours Company (CC - Free Report) : The company is into chemical business. The Zacks Industry Rank of the stock is in the top 22%.
Teck Resources Limited : The company is into mining and mineral development. The Zacks Industry Rank of the stock is in the top 16%.
Best Buy Co. Inc. (BBY - Free Report) : The company sells personal computers, consumer electronics, major appliances and related accessories mainly through its retail stores. The Zacks Industry Rank of the stock is in the top 26%.
Amazon.com Inc. (AMZN - Free Report) : It is one of the largest online retailers in the world with the Zacks Industry Rank within the top 17%.
Marinemax Inc. (HZO - Free Report) : The company is a recreational boat dealer in the U.S. Its industry rank is within the top 25%.
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.
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 »