It is earnings season again!
While this season brings the potential for big moves, investors are presented with a very interesting situation thanks to recent record-breaking market performance, and of course, the tax cuts which have sent earnings estimates through the roof.
Lots of stocks are near highs, but performances have been very different depending on the sector. Energy stocks have rebounded nicely, while technology and financials are leading the way for investors this time around. However, that doesn't mean the dart-board approach is going to work for you. There are still industries under tremendous stress and with interest rates on the rise you need to be smart with your next moves.
In this bullish stock market environment, investors need to focus on companies with the best fundamentals in order to find the big winners this earnings season.
One way to uncover them ahead of time is with our proprietary system called 'Earnings ESP' (Expected Surprise Prediction) which can assist you in uncovering these huge winners before they report earnings.
So if you want to increase your odds of success this earnings season -- and who wouldn't given the market backdrop? -- then this is one metric you need to know.
The Crystal Ball of Earnings Season
While it is impossible to know with complete certainty which stocks will deliver positive surprises this earnings season and which ones will disappoint, our proprietary Earnings ESP system determines which stocks have the best chance to surprise with their next earnings announcement. This method predicts earnings surprises with more than 80% accuracy.
The Earnings ESP is simply the percentage difference between the 'Most Accurate Estimate' and the 'Zacks Consensus Estimate' for a company's upcoming earnings per share number:
Earnings ESP = (Most Accurate Estimate / Zacks Consensus Estimate) -1
The most accurate estimate is the consensus of earnings estimates from analysts over the last 30 days. The Zacks Consensus Estimate, on the other hand, takes the consensus of all analysts' estimates for the quarter, even if that estimate hasn't been revised in three months.
Timeliness Is Critical
The underlying concept here is that the most recent analyst estimate revisions are usually the most accurate. Think about it -- if an analyst revises his earnings estimate right before an earnings release, he is likely using fresh information that will lead to a more accurate estimate than what analysts predicted two or three months ago.
Just like with a weather forecast that is more accurate for tomorrow than when trying to predict the weather three months from now, the more accurate estimates will usually be the ones that have all the most recent information at their disposal.
For example, let's say specialty retailer XYZ Corp reports earnings next week. The Zacks Consensus Estimate for the coming quarter is comprised of eight analysts' estimates and is $0.75. However, three analysts have increased their earnings estimates for XYZ Corp within the last 30 days.
Perhaps these analysts have recently visited stores and measured traffic, spoken with suppliers, surveyed customers or incorporated recent economic data into their earnings models. The consensus among these recent estimates is $0.78. That would give XYZ Corp an Earnings ESP of 4$ ($0.78/$0.75). This company is likely to deliver a positive earnings surprise.
While not all companies that deliver positive earnings surprises will see their stock price rise, studies show that, on average, companies that deliver solid beats see excess returns in their share price for several weeks following the report. This is known as the post-earnings-announcement drift. And finding these stocks before they beat, and then holding them in this 'drift' period, can really boost your returns.
Despite several headwinds facing the market, there are bound to be plenty of large positive surprises this quarter. Utilizing Zacks' Earnings ESP system can greatly increase your odds of finding these big winners before they report.
How Can the Earnings ESP Work for You?
You could start your stock search with this metric. The problem is that in each earnings season, including now, there are hundreds of stocks with positive ESPs.
That is why our Zacks research team created a special strategy that uses additional filters to narrow down the lists. It detects rare companies that are most likely to both beat earnings and jump in price. This drives the portfolio I am managing called Zacks Surprise Trader.
I can't share all the details of its formula with you, but it relies on two under-used criteria coming from the brokerage analyst community. These two factors are then layered on top of other time-tested elements such as the Zacks Rank and Zacks Industry Rank to find only the best stocks in the best industries.
This is a significant research breakthrough, and it predicts positive earnings surprises before they are reported, with documented 81.9% accuracy.
In today's historic market conditions, stocks that beat expectations could experience big price pops and keep on climbing higher.
So if you would like to pursue quick, double-digit gains this earnings season, and are ready to move on the flurry of positive surprises we're turning up, then I invite you to join us.
As a bonus, you are invited to download our "Early Warning Alert" report. It reveals stocks with the highest probability of falling short of expectations according to our Earnings ESP data. Use this report to protect your portfolio from companies that are likely to report negative surprises next week (January 29 - February 2).
But don't delay. We can't let too many share our "surprise" recommendations so they are generally closed to the public. Today the portfolio is briefly open again, but your chance to gain access ends Sunday, January 28.
Look into Zacks Surprise Trader now >>
Dave Bartosiak is Zacks' resident earnings surprise and momentum expert. He selects stocks and delivers daily commentary for our Surprise Trader portfolio.