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Three Things to Focus On This Earnings Season

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Earnings season is that one big opportunity to rebalance your portfolio. Because this is the one big event that comes by each quarter and tells us more about each and every stock. So if you’re thinking that any of your holdings aren’t doing as well as you expected, you can use this time to dump it and get on to something better.

Zacks methodology already positions you to profit from the event. And so, as you probably already have figured out, you have a reasonable chance (of around 70%) of making some quick gains using the earnings Expected Surprise Prediction (ESP) for buy and hold-rated stocks. But in case that makes you nervous, or if you’d rather see something concrete before committing your funds, read on.

Rule #1: Look for Big Beats

A close beat or near miss essentially means that the company hasn’t don’t much better or worse than what everyone was expecting. But when there’s a big beat, it usually means that either the company has overdelivered on some expectation or that there was something really great that unfolded during the quarter.

Of course, this great thing can be a one-off thing, in which case the surprise would be less exciting. But even if that’s the case, it means (as has been seen countless times in the past) that the shares will move higher over the next few months.

And if the good news is likely to continue, as in a positive trend, chances are prices will remain buoyant for longer. Whatever is the case, a big beat means that share price appreciation is coming.

Rule #2: Choose Your Tech Wisely

The first few earnings reports from the tech sector show mixed prospects. Taiwan Semiconductor (TSM - Free Report) came out saying that its auto customers would see chip constraints easing this quarter although overall chip supply was likely to remain constrained through the beginning of 2022. But since the company plays such a central role in chip making, it provided encouraging guidance.

Texas Instruments (TXN - Free Report) on the other hand seemed to indicate uncertain prospects. It remains hard to explain why the company isn’t seeing stronger demand if the chip shortage is continuing.

Then we have ASML, which reported strong numbers and guidance. But that’s understandable given that chipmakers all over are scrambling to add capacity (either to bring chipmaking within their borders) or to simply bridge the gap between demand and supply. I would avoid buying semis at the moment, although there’s no reason to sell off any of these stocks yet, if you are holding them currently.

Rule #3: Don’t Ignore Large-Cap Growth

While we shouldn’t chase the really risky bets and value plays should not be ignored either, this is a good time to invest in growth stocks, given the way inflation is running. If you’d like to lower your risk, go for larger cap players because they tend to be more stable.  

And certainly, if you can pair that with a #1 (Strong Buy) or #2 (Buy) Zacks Rank, it’s a good indicator of a stock’s upside potential. The rank is built on earnings estimates and revisions (among other things) and has a proven track record of beating the market for 20+ years.

Here is a list of buy-ranked stocks that belong to the top 100 Zacks-classified industries and have a Growth Score of A. What’s more, they are seeing a strong estimate revision trend-

Aluminum Corporation of China Ltd. (ACH - Free Report)

Chewy Inc. (CHWY - Free Report)

Equinor ASA (EQNR - Free Report)

Li Ning Co. (LNNGY - Free Report)

Orient Overseas International Ltd. (OROVY - Free Report)

Ovintiv Inc. OVV

Straumann Holding AG (SAUHF - Free Report)

VALE S.A. (VALE - Free Report)

Voestalpine AG (VLPNY - Free Report)

United States Steel Corporation (X - Free Report)