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The bells are ringing for the earnings season and investors’ hunt for potential outperforming stocks is on. After all, this is the time when investors decide on which stocks to pick and which one to toss out from their portfolio, based on a company’s earnings scorecard.
While evaluating earnings performance, there are various factors investors normally take a look at. But among all these, earnings beat seems to be a more powerful driver of stock movement than factors like earnings growth or acceleration. A positive earnings surprise or earnings beat is typically the case when actual or reported earnings come in above the consensus estimate.
What Makes Earnings Beat Superior to Earnings Growth
Investors always try to prepare themselves ahead of time and search for stocks poised to come up with a stellar performance. After much thinking, Wall Street analysts project earnings of companies. These estimates act as investment leads. Historically, if a company’s earnings manage to beat market expectations, its stock surges post release.
This is becausea 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 sometimes. 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.
On the other hand, analysts put together their insights and a company’s guidance when giving an earnings estimate. Thus, outperforming that estimate is almost equivalent to beating the company’s own expectation as well as market perception.
How to Find Stocks that Can Beat?
Now, since it is difficult to predict if a company will beat or miss in the upcoming earnings season, investors can check the earnings surprise history. An impressive track in this regard generally acts as a catalyst in sending a stock higher. It indicates the company’s ability to surpass estimates. And investors generally believe that the company will have the same trick up its sleeve or in other words is smart enough to beat on earnings 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 less than or equal to 2: Only companies with a Strong Buy or 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 (Strong Buy), 2 (Buy) or 3 (Hold) 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 10 stocks:
Matador Resources Company (MTDR - Free Report) : This Zacks Rank #2 energy company is engaged in the exploration and development of oil and natural gas resources. The Zacks Industry Rank of the stock is in the top 20%.
Best Buy Co. Inc. (BBY - Free Report) : The stock operates in a single business segment, selling personal computers and other home office products, consumer electronics and related accessories mainly through its retail stores. The Zacks Industry Rank of the stock is in the top 10%. Best Buy sports a Zacks Rank #1. You can see the complete list of today’s Zacks #1 Rank stocks here.
Morgan Stanley (MS - Free Report) : The Zacks Rank #1 stock is a key global financial services firm operating in three primary businesses: securities; asset management; and credit services. The Zacks Industry Rank of the stock is in the top 4%.
Halliburton Company (HAL - Free Report) : The Zacks Rank #2 stock is one of the world's largest providers of products and services to the energy industry. The Zacks Industry Rank of the stock is in the top 31%.
EQT Corp (EQT - Free Report) : This is an integrated energy company with a Zacks Rank #2. The Zacks Industry Rank of the stock is in the top 21%.
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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Profit Out of Earnings Beat: Buy These 5 Stocks
The bells are ringing for the earnings season and investors’ hunt for potential outperforming stocks is on. After all, this is the time when investors decide on which stocks to pick and which one to toss out from their portfolio, based on a company’s earnings scorecard.
While evaluating earnings performance, there are various factors investors normally take a look at. But among all these, earnings beat seems to be a more powerful driver of stock movement than factors like earnings growth or acceleration. A positive earnings surprise or earnings beat is typically the case when actual or reported earnings come in above the consensus estimate.
What Makes Earnings Beat Superior to Earnings Growth
Investors always try to prepare themselves ahead of time and search for stocks poised to come up with a stellar performance. After much thinking, Wall Street analysts project earnings of companies. These estimates act as investment leads. Historically, if a company’s earnings manage to beat market expectations, its stock surges post release.
This is becausea 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 sometimes. 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.
On the other hand, analysts put together their insights and a company’s guidance when giving an earnings estimate. Thus, outperforming that estimate is almost equivalent to beating the company’s own expectation as well as market perception.
How to Find Stocks that Can Beat?
Now, since it is difficult to predict if a company will beat or miss in the upcoming earnings season, investors can check the earnings surprise history. An impressive track in this regard generally acts as a catalyst in sending a stock higher. It indicates the company’s ability to surpass estimates. And investors generally believe that the company will have the same trick up its sleeve or in other words is smart enough to beat on earnings 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 less than or equal to 2: Only companies with a Strong Buy or 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 (Strong Buy), 2 (Buy) or 3 (Hold) 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 10 stocks:
Matador Resources Company (MTDR - Free Report) : This Zacks Rank #2 energy company is engaged in the exploration and development of oil and natural gas resources. The Zacks Industry Rank of the stock is in the top 20%.
Best Buy Co. Inc. (BBY - Free Report) : The stock operates in a single business segment, selling personal computers and other home office products, consumer electronics and related accessories mainly through its retail stores. The Zacks Industry Rank of the stock is in the top 10%. Best Buy sports a Zacks Rank #1. You can see the complete list of today’s Zacks #1 Rank stocks here.
Morgan Stanley (MS - Free Report) : The Zacks Rank #1 stock is a key global financial services firm operating in three primary businesses: securities; asset management; and credit services. The Zacks Industry Rank of the stock is in the top 4%.
Halliburton Company (HAL - Free Report) : The Zacks Rank #2 stock is one of the world's largest providers of products and services to the energy industry. The Zacks Industry Rank of the stock is in the top 31%.
EQT Corp (EQT - Free Report) : This is an integrated energy company with a Zacks Rank #2. The Zacks Industry Rank of the stock is in the top 21%.
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 »