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Three Stocks Set to Beat Estimates Next Week

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Earnings season is just underway and we still have yet to see a clear picture of revenue growth, profitability and margin.  With the 25 reports or so that have come in, it’s been a very mixed picture.  While there haven’t been any bullish standouts, there have been several high-profile negative surprises.  Adding to the disappointment today was Fortinet ((FTNT - Free Report) ); its shares dropped by 18% after results and expectations missed Wall Street’s expectations.

The bottom line is that growth expectations remain weak, a reflection of underwhelming management guidance and tough comparisons.  Tough comparisons and weak management guidance account for the weak earnings growth picture. Total earnings reached their highest quarterly total in the first quarter of 2012 and have yet to get back to that level.

Total Q1 earnings are expected to be down -2.6% from the same period last year, which reflects -0.9% drop in revenues and a modest contraction in margins.  It is amazing that the S&P 500 is up 15% in that same time frame.

As we continue our search for stocks that have a high likelihood of beating estimates, the Zacks Earnings ESP can be a useful tool in your search.  Here are a few companies that look promising next week:

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
Yahoo! (YHOOis a Zacks Rank #1 stock with a positive earnings ESP of 2.04% for the current quarter.  The company is expected to make 24 cents a share, but our ESP readings are looking for a profit of 25 cents.

While the ESP for Yahoo may not be extreme, they have beat estimates the last 4 quarters in a row with an average beat of 35.13% over the Zacks consensus. 

Marissa Meyer has made sweeping changes to the “old tech” company to revive its core search business and grow its other competencies.  YHOO recently made the news when it recently forked over $30 million for news summarization app Summly and its 17-year old creator.

 It’s this aggressiveness and innovative technology that may continue to drive Yahoo’s shares higher.

– Yahoo! reports earnings on April 16th.

Goldman Sachs ((GS - Free Report) ) is a Zacks Rank #3 stock with a positive earnings ESP of 4.80% for the current quarter; the Zacks Consensus is for a per share profit of $3.75. with the most accurate at $3.89.

Financials are not expected to have a stellar quarter, which should help keep expectations low for this financial giant that trades at just 11 times forward earnings.

Expectations are for Goldman to grow earnings at 9.4% this year on decreasing revenues.

The majority of analyst action has been bullish and we have seen estimates on the rise for the current quarter as well as FY 2013 and FY 2014 since Goldman’s last report.  Q2 estimates have come down slightly to $2.93 from $2.98.

– Goldman reports earnings on April 16th.

Blackstone Group ((BX - Free Report) is a Zacks Rank #3 stock with a positive earnings ESP of 5.66% for the current quarter.  The Zacks consensus estimate is for Q1 EPS of $0.53 with the most accurate estimate coming in at $0.56.

Like the rest of the finance sector, expectations are muted for this global investment and advisory firm as it only trades at 9.45 times forward earnings.

What I find interesting and compelling is that the company is expected to see almost 20% earnings growth in 2013 on a 25.2% rise in revenues; not the sort of growth outlook expected for such a modest valuation.  The current PEG ratio is rather low at 0.48.

– Blackstone reports earnings on April 18th.

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.

 Jared A Levy is one of the most highly sought after traders in the world and a former member of three major stock exchanges. That is why you will frequently see him appear on Fox Business, CNBC and Bloomberg providing his timely insights to other investors. He has written and published two tomes, “Your Options Handbook” and “The Bloomberg Visual Guide to Options”.  You can discover more of his insights and recommendations through his two portfolio recommendation services:

Follow Jared A Levy on twitter @jaredalevy

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