Earnings season is set to unofficially begin next week with the release of Alcoa’s earnings on Monday the 8th. Several S&P 500 stocks have already begun reporting with initial reports from the likes of Oracle (ORCL - Analyst Report ) and FedEx ( FDX - Analyst Report ) already disappointing investors.
Of course it’s too early to tell how this season will shape up, but it’s important to note that growth expectations remain weak, a reflection of underwhelming management guidance and tough comparisons -- the first quarter of 2012 remains the high point of quarterly earnings since the economy has been “expanding” since 2009.
The financial sector is expected to experience an earnings decline after many quarters of double-digit growth. The outlook for Tech is even weaker and fairly widespread, which would come after the sector’s underwhelming results in the previous quarter.
Revenue growth will be closely monitored as many companies have reached their peak margin levels. Even with low expectations, it will be a challenge to target companies that exceed analysts’ estimates. The Zacks Earnings ESP can be a useful tool in your search; here are a few companies with positive ESPs and a Zacks Rank of 3 or less (Hold to Strong Buy).
About Zacks Earnings ESP
Earnings ESP is Zacks’ proprietary methodology for determining which stocks have the best chance to surprise with their next earnings announcement. The Earnings ESP shows the percentage difference between the Most Accurate Estimate and the Consensus. The Zacks ESP helps predict earnings surprises to the upside and downside; the greater the ESP (positive or negative) the greater the likelihood for a surprise. I use ESP to help quantify the conviction of the analysts for a surprise and stack the odds in my favor when I combine it with other measurements and statistics.
The Accuracy of ESP
Of course, some ESP numbers are better than others. In our testing, over the last 10 years, we have found that stocks with a positive ESP and with a Zacks Rank of 1, 2 or 3 (Strong Buy, Buy or Hold), produced a positive surprise 70% of the time.
(The other 9% of the time, they reported in line with expectations, with a negative surprise occurring only 21% of the time.)
Bullish ESP Stocks
Progressive Insurance ( PGR - Analyst Report ) is a Zacks Rank #1 stock with a positive earnings ESP of 4.65% for the current quarter. The company is expected to make 43 cents a share, but our ESP readings are looking for a profit of 45 cents.
Progressive is unique in that it’s one of the only companies that reports earnings monthly. While this may diminish volatility, it allows investors to keep a more constant eye on the company’s health.
Progressive is trading at 17 times forward earnings, but has been delivering solid growth even with super storm Sandy. Strength in their last report was primarily driven by 9% year over year growth in net premiums and 111% escalation in net realized investment gains. Expectations are for the company to grow earnings at roughly 7% year over year.
– Progressive reports earnings on April 10th.
JB Hunt Transport ( JBHT - Analyst Report ) is a Zacks Rank #2 stock with a positive earnings ESP of 4.69% for the current quarter; the Zacks Consensus is for a per share profit of $0.64.
Intermodal transport (diversified) accounted for 61% or $821 million of JBHT’s revenue in Q42012, up 13% compared to Q42011. Their Total revenue was up 11% in that same time frame. What makes that more remarkable is that shipments were basically flat in that same time frame, while expenditures were down according to the Cass Freight Index.
Analysts also seem to be getting slightly more bullish on the stock as ESPs are all positive for the coming reporting periods. Shares trade at 24 times forward earnings and JBHT will have to deliver on its 16% growth in 2013 to keep investors happy.
– JB Hunt reports earnings on April 11th.
JP Morgan Chase ( JPM - Analyst Report ) is a Zacks Rank #2 stock with a positive earnings ESP of 6.62% for the current quarter. The Zacks consensus estimate is for Q4 EPS of $1.36, with the most accurate estimate at $1.45.
JP Morgan has managed to beat the Zacks Consensus estimate for the last 4 quarters in a row with an average beat of 24.66%.
When you clear out all the headlines, you have a stock trading at just 8.8 times forward earnings with expected earnings growth of 7.12%, giving this bank a PEG ratio of just 1.26.
JPMorgan Chase & Co recently won the dismissal of the vast majority of a lawsuit accusing it of misleading Belgian-French bank Dexia SA into buying more than $1.6 billion of troubled mortgage debt.
– JP Morgan Chase reports earnings on April 12th.
ESP Earnings Results
Now that you know which groups of stocks to focus on to increase your chances of a positive surprise, let’s look at the size of the ESP that has historically generated the best results.
First, just having a positive ESP produces market beating results. Over the last 10 years, using a 1 week holding period (stocks were held for no more than one week after they reported), the average annual return was 23.5%. This is in stark contrast to stocks with a negative ESP which produced a -9.20% return.
Now apply the Zacks Rank of 1, 2 or 3 to that list and the returns jump to 28.3%.
If you require your stocks to have an ESP of greater than 1%, we found it increased performance to 29.6%. An ESP of greater than 2% bumps performance up to 31.6%. While an ESP of greater than 3%, produces an average annual return of 37.2%.
Note: there’s no need to hold out for stocks with significantly higher ESP’s than 3%. While some stocks with higher ESP’s will do fantastic, there’s no aggregate increase in performance by ratcheting it up beyond d the 3% threshold. And as the above stats illustrate, simply having a positive ESP (i.e., the Most Accurate Estimate is above the Consensus) still produces stellar results with a high probability of success.
Start Using Zacks ESP in Your Own Trading Today
The next time your stock is about to report or a stock on your watch list is getting closer to their earnings date, be sure to look at its Zacks ESP and see what your stock’s probabilities are of producing a positive surprise.
If you prefer to let someone else do all the work and have the best candidates sent to your inbox, learn more about Whisper Trader now.