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We are in the tail end of the Q4 earnings season with over 71% of the S&P 500 constituents having reported already. The season has so far been fairly solid with earnings growth on track to be the highest in two years.
However, investors should note that though the growth picture is brightening, beat ratiosare on the lower side. So far, 68% beat EPS estimates against 76.7% in the previous quarter, with 74.5% being the four-quarter average and 72.7% being the 12-quarter average, as per the Earnings Trends issued on February 1, 2017.
Though earnings growth momentum should cheer up investors, slowing positive earnings surprise might make some jittery.
Why Is a 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 it has been decelerating.
Also, seasonal fluctuations can come into play. If a company’s Q1 is seasonally weak and Q4 is strong, 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 a whole lot of research and analysis on a company’s financials and initiatives, Wall Street analysts project its earnings. They also take a company’s guidance into consideration 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 Out Likely Outperformers?
Now, finding stocks that have the potential to beat on the bottom line is a dream that investors chase but might not always come true. One way of fulfilling it is by looking at the earnings surprise history of a company.
An impressive track in this regard generally acts as a driver in sending a stock higher. It indicates the company’s ability to exceed estimates. And 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 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 just 11.
Here are five out of 11 stocks:
McDermott International Inc. : This is a provider of engineering, construction and module fabrication services for upstream field developments. The company carries a Zacks Rank #1. The Zacks Industry Rank of the stock is in the top 14%. You can see the complete list of today’s Zacks #1 Rank stocks here.
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 14%.
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 is in the top 37%.
Sunrun Inc. (RUN - Free Report) : This developer and seller of residential solar energy systems is in the top 37% of the Zacks Industry Rank. The company sports a Zacks Rank #1.
Applied Optoelectronics Inc. (AAOI - Free Report) : This designer and manufacturer of advanced optical devices is in the top 44% of the Zacks Sector Rank, though the Industry Rank is in the bottom 42%. The company sports a Zacks Rank #1.
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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Bet on Likely Earnings Beat with These 5 Stocks
We are in the tail end of the Q4 earnings season with over 71% of the S&P 500 constituents having reported already. The season has so far been fairly solid with earnings growth on track to be the highest in two years.
However, investors should note that though the growth picture is brightening, beat ratiosare on the lower side. So far, 68% beat EPS estimates against 76.7% in the previous quarter, with 74.5% being the four-quarter average and 72.7% being the 12-quarter average, as per the Earnings Trends issued on February 1, 2017.
Though earnings growth momentum should cheer up investors, slowing positive earnings surprise might make some jittery.
Why Is a 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 it has been decelerating.
Also, seasonal fluctuations can come into play. If a company’s Q1 is seasonally weak and Q4 is strong, 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 a whole lot of research and analysis on a company’s financials and initiatives, Wall Street analysts project its earnings. They also take a company’s guidance into consideration 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 Out Likely Outperformers?
Now, finding stocks that have the potential to beat on the bottom line is a dream that investors chase but might not always come true. One way of fulfilling it is by looking at the earnings surprise history of a company.
An impressive track in this regard generally acts as a driver in sending a stock higher. It indicates the company’s ability to exceed estimates. And 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 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 just 11.
Here are five out of 11 stocks:
McDermott International Inc. : This is a provider of engineering, construction and module fabrication services for upstream field developments. The company carries a Zacks Rank #1. The Zacks Industry Rank of the stock is in the top 14%. You can see the complete list of today’s Zacks #1 Rank stocks here.
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 14%.
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 is in the top 37%.
Sunrun Inc. (RUN - Free Report) : This developer and seller of residential solar energy systems is in the top 37% of the Zacks Industry Rank. The company sports a Zacks Rank #1.
Applied Optoelectronics Inc. (AAOI - Free Report) : This designer and manufacturer of advanced optical devices is in the top 44% of the Zacks Sector Rank, though the Industry Rank is in the bottom 42%. The company sports a Zacks Rank #1.
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 »