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Profit from Surprise in Q2 2019 Earnings Season

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Second quarter 2019 earnings season unofficially starts early next week when the big banks, such as Citigroup (C - Free Report) and JPMorgan Chase & Co. (JPM - Free Report) , report their report June-quarter financial results. With that said, by the time that happens almost two dozen other S&P 500 members will have already reported their most recent quarterly results.

This means now is a great time to try to find stocks that look poised to benefit from an earnings-season boost. And today we picked a screen that works well both before and after a company reports their quarterly financial results.

Every earnings season features positive and negative surprises on both the top and the bottom lines. Therefore, our screen focuses on earnings and revenue surprises because investors should pay close attention to both metrics.

Before we dive into the screen, let’s quickly go over the basic principles. In general, if a company reports quarterly earnings above expectations it is considered a positive surprise, and the firm’s stock price often climbs. On the other hand, prices generally go down when a company reports a negative surprise. Clearly, there are many other circumstances that impact where a stock heads, such as guidance.

With that said, a surprise represents far more than just an extra few dollars or cents a company made or lost during the period. It is instead a look into what a company’s earnings might be or should be, down the road. 

Investors should also note that when these surprises occur, the market quickly tries to re-price the stock to reflect the new information.

Not All Surprises Are Created Equal

It might seem intuitive, but it is still worth diving into the differences between surprises. For starters, some earnings surprises can be attributed to cost-cutting measures and others are due to revenue jumps.

Sales growth often produces a larger price reaction compared to its money-saving counterpart because revenue growth is viewed as more sustainable. The reasoning is straightforward: once a company has cut costs, where is its future growth going to come from? Firms can only cut so many costs. Meanwhile, sales growth is one of the most vital components of long-term growth.

Along with earnings and revenue results, investors also need to pay attention to guidance. If a company reports a positive surprise and downward guidance it will often cause negative stock price movement since the firm diminished the hope of the future growth that comes with a positive surprise.

We also need to pay close attention to financial results that are not truly “surprises.” For instance, companies that always beat their estimates, or stocks that have already had a “surprise” priced in by climbing or falling before an announcement. These situations might not be treated as surprises at all. In fact, in some cases, we can see the opposite reaction to an earnings surprise, known as “buy the rumor, sell the fact” type events.

With all that said, predicting which companies will surprise one way or the other is difficult. The benefits, however, of an earnings surprise will typically last for one to three months after a surprise is reported.

This means you can get in after a company reports a surprise, or you can try and find companies that are more likely to report a surprise, and get in ahead of time.

Screening Parameters

 

 

• Last EPS Surprise greater than or equal to 5%

(Stocks posting positive surprises have a tendency of surprising again.)

• Last Sales Surprise greater than or equal to 5%

(A positive sales surprise shows top-line strength. And once again, a company that has surprised in the past is more likely to surprise again in the future.)

• Zacks Rank less than or equal to 2

(Only Zacks Rank #1 and #2 Strong Buys and Buys.)

• Price greater than or equal to $10 and an Average 20-Day Volume greater than or equal to 100,000

Just these few criteria help narrow down the universe from over 8,800 stocks to a much more manageable group. Tuesday’s screen pulled in 65 stocks.

Here are 5 stocks that meet today’s criteria…

Roku, Inc. (ROKU - Free Report)

Ciena Corporation (CIEN - Free Report)

Hess Corporation (HES - Free Report)

DexCom, Inc. (DXCM - Free Report)

Universal Display Corporation (OLED - Free Report)

All of these companies reported both earnings surprises and sales surprises their last time out. A great combination. And we could see more of the same this time around as well.

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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/.

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