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It is not surprising that before an earnings season, every investor looks for stocks that can beat market expectation. This is because investors always try to position themselves ahead of time and look to tap stocks that are high-quality in nature.
Thus, taking a step beyond the basic earnings growth metric and analysing the quarterly results from the earnings beat point of view seems to be an intriguing idea. Asbury Automotive Group (ABG - Free Report) , Allscripts Healthcare Solutions (MDRX - Free Report) , HarleyDavidson (HOG - Free Report) , AGCO (AGCO - Free Report) and CBRE Group (CBRE - Free Report) are some stocks that fit this investment strategy.
Why Is a Positive Earnings Surprise So Important?
Historically, stocks of companies with solid quarterly earnings (on a nominal basis) tank if they miss or merely meet market expectations. After all, a 20% earnings rise (though apparently looks good) doesn’t tell you if earnings growth has been exhibiting a decelerating trend.
Also, seasonal fluctuations come into play sometimes. If a company’s Q1 is seasonally weak and Q4 strong, then it is likely to report a sequential earnings decline. In such cases, growth rates are misleading while judging the true health of a company.
Meanwhile, after much brainstorming and analysis of companies’ financials and initiatives, Wall Street analysts project earnings of companies. They in fact club their insights and a company’s guidance when deriving an earnings estimate.
Thus, outperforming that estimate is almost equivalent to beating the company’s own expectation as well as the market perception. And if the margin of earnings surprise is big, it typically drives the stock higher right after the release. Thus, more than anything else, an earnings surprise can push a stock higher.
How to Find Stocks That Can Beat?
Now, finding stocks that have the potential to beat on the bottom line may be investors’ dream but not an easy job. One way to do this is to look at the earnings surprise history of the company.
An impressive track in this regard generally acts as a catalyst in sending a stock higher. It indicates the company’s ability to surpass estimates. And investors generally believe that the company will apply the same secret sauce to execute yet another earning beat in its next release.
The Winning Strategy
In order to shortlist stocks that are likely to come up with an earnings surprise, we chose the following as our primary screening parameters.
Last EPS Surprise greater than or equal to 10%: Stocks delivering positive surprise in the last quarter tend to surprise again.
Average EPS Surprise in the last four quarters greater than 20%: We lifted the bar for outperformance slight higher by setting the average earnings surprise for the last four quarters at 20%.
Average EPS Surprise in the last two quarters greater than 20%: This points to a more consistent surprise history and makes the case for another surprise even stronger.
In addition, we place a few other criteria that raise the chance of a positive surprise.
Zacks Rank less than or equal to 2: Only companies with a Zacks Rank #1 (Strong Buy) or 2 (Buy) rating can get through.
Earnings ESP greater than zero: A stock needs to have both a positive Earnings ESP and a Zacks Rank of #1, 2 or 3 for an earnings beat, per our proven model.
In order to zero in on those that have long-term growth potential and high trading liquidity we have added the following parameters too:
Next 3–5 Years Estimated EPS Growth (Per Year) greater than 10%: Solid expected earnings growth exhibits the stock’s long-term growth prospects.
Average 20-day Volume greater than 100,000: High trading volume implies that the stocks have adequate liquidity.
A handful of criteria has narrowed down the universe from over 7,700 stocks to nine.
Here are five out of the nine stocks:
Asbury Automotive Group (ABG - Free Report) :This Zacks Rank #1 company is one of the largest automotive retailers. Asbury offers customers an extensive range of automotive products and services, including new and used vehicle sales and related financing and insurance, vehicle maintenance and repair services, replacement parts and service contracts. You can see the complete list of today’s Zacks #1 Rank stocks here.
The average earnings surprise for ABG in the trailing four quarters is 24.33%.
Allscripts Healthcare Solutions (MDRX - Free Report) : The company provides information technology solutions and services to healthcare organizations. It has a Zacks Rank #2.
The average earnings surprise for MDRX in the trailing four quarters is 34.07%.
HarleyDavidson (HOG - Free Report) : The Zacks Rank #2 company is the parent entity of company groups doing business as Harley-Davidson Motor Company and Harley-Davidson Financial Services.
The average earnings surprise for HOG in the trailing four quarters is 77.59%.
AGCO (AGCO - Free Report) : AGCO Corporation is a leading manufacturer and distributor of agricultural equipment and related replacement parts. It has a Zacks Rank #2.
The average earnings surprise for AGCO in the trailing four quarters is 56.65%.
CBRE Group (CBRE - Free Report) : This Zacks Rank #2 company is a commercial real estate services and investment firm, offering a wide range of services to tenants, owners, lenders and investors in office, retail, industrial, multi-family and other types of commercial real estates in all major metropolitan areas across the globe.
The average earnings surprise for CBRE in the trailing four quarters is 41.02%.
You can get the rest of the stocks on this list by signing up now for your 2-week free trial to the Research Wizard and start using this screen in your own trading. Further, you can also create your own strategies and test them first before taking the investment plunge.
The Research Wizard is a great place to begin. It's easy to use. Everything is in plain language. And it's very intuitive. Start your Research Wizard trial today. And the next time you read an economic report, open up the Research Wizard, plug your finds in, and see what gems come out.
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.
Image: Bigstock
5 Top Stocks Likely to Beat Earnings Estimates
It is not surprising that before an earnings season, every investor looks for stocks that can beat market expectation. This is because investors always try to position themselves ahead of time and look to tap stocks that are high-quality in nature.
Thus, taking a step beyond the basic earnings growth metric and analysing the quarterly results from the earnings beat point of view seems to be an intriguing idea. Asbury Automotive Group (ABG - Free Report) , Allscripts Healthcare Solutions (MDRX - Free Report) , HarleyDavidson (HOG - Free Report) , AGCO (AGCO - Free Report) and CBRE Group (CBRE - Free Report) are some stocks that fit this investment strategy.
Why Is a Positive Earnings Surprise So Important?
Historically, stocks of companies with solid quarterly earnings (on a nominal basis) tank if they miss or merely meet market expectations. After all, a 20% earnings rise (though apparently looks good) doesn’t tell you if earnings growth has been exhibiting a decelerating trend.
Also, seasonal fluctuations come into play sometimes. If a company’s Q1 is seasonally weak and Q4 strong, then it is likely to report a sequential earnings decline. In such cases, growth rates are misleading while judging the true health of a company.
Meanwhile, after much brainstorming and analysis of companies’ financials and initiatives, Wall Street analysts project earnings of companies. They in fact club their insights and a company’s guidance when deriving an earnings estimate.
Thus, outperforming that estimate is almost equivalent to beating the company’s own expectation as well as the market perception. And if the margin of earnings surprise is big, it typically drives the stock higher right after the release. Thus, more than anything else, an earnings surprise can push a stock higher.
How to Find Stocks That Can Beat?
Now, finding stocks that have the potential to beat on the bottom line may be investors’ dream but not an easy job. One way to do this is to look at the earnings surprise history of the company.
An impressive track in this regard generally acts as a catalyst in sending a stock higher. It indicates the company’s ability to surpass estimates. And investors generally believe that the company will apply the same secret sauce to execute yet another earning beat in its next release.
The Winning Strategy
In order to shortlist stocks that are likely to come up with an earnings surprise, we chose the following as our primary screening parameters.
Last EPS Surprise greater than or equal to 10%: Stocks delivering positive surprise in the last quarter tend to surprise again.
Average EPS Surprise in the last four quarters greater than 20%: We lifted the bar for outperformance slight higher by setting the average earnings surprise for the last four quarters at 20%.
Average EPS Surprise in the last two quarters greater than 20%: This points to a more consistent surprise history and makes the case for another surprise even stronger.
In addition, we place a few other criteria that raise the chance of a positive surprise.
Zacks Rank less than or equal to 2: Only companies with a Zacks Rank #1 (Strong Buy) or 2 (Buy) rating can get through.
Earnings ESP greater than zero: A stock needs to have both a positive Earnings ESP and a Zacks Rank of #1, 2 or 3 for an earnings beat, per our proven model.
In order to zero in on those that have long-term growth potential and high trading liquidity we have added the following parameters too:
Next 3–5 Years Estimated EPS Growth (Per Year) greater than 10%: Solid expected earnings growth exhibits the stock’s long-term growth prospects.
Average 20-day Volume greater than 100,000: High trading volume implies that the stocks have adequate liquidity.
A handful of criteria has narrowed down the universe from over 7,700 stocks to nine.
Here are five out of the nine stocks:
Asbury Automotive Group (ABG - Free Report) :This Zacks Rank #1 company is one of the largest automotive retailers. Asbury offers customers an extensive range of automotive products and services, including new and used vehicle sales and related financing and insurance, vehicle maintenance and repair services, replacement parts and service contracts. You can see the complete list of today’s Zacks #1 Rank stocks here.
The average earnings surprise for ABG in the trailing four quarters is 24.33%.
Allscripts Healthcare Solutions (MDRX - Free Report) : The company provides information technology solutions and services to healthcare organizations. It has a Zacks Rank #2.
The average earnings surprise for MDRX in the trailing four quarters is 34.07%.
HarleyDavidson (HOG - Free Report) : The Zacks Rank #2 company is the parent entity of company groups doing business as Harley-Davidson Motor Company and Harley-Davidson Financial Services.
The average earnings surprise for HOG in the trailing four quarters is 77.59%.
AGCO (AGCO - Free Report) : AGCO Corporation is a leading manufacturer and distributor of agricultural equipment and related replacement parts. It has a Zacks Rank #2.
The average earnings surprise for AGCO in the trailing four quarters is 56.65%.
CBRE Group (CBRE - Free Report) : This Zacks Rank #2 company is a commercial real estate services and investment firm, offering a wide range of services to tenants, owners, lenders and investors in office, retail, industrial, multi-family and other types of commercial real estates in all major metropolitan areas across the globe.
The average earnings surprise for CBRE in the trailing four quarters is 41.02%.
You can get the rest of the stocks on this list by signing up now for your 2-week free trial to the Research Wizard and start using this screen in your own trading. Further, you can also create your own strategies and test them first before taking the investment plunge.
The Research Wizard is a great place to begin. It's easy to use. Everything is in plain language. And it's very intuitive. Start your Research Wizard trial today. And the next time you read an economic report, open up the Research Wizard, plug your finds in, and see what gems come out.
Click here to sign up for a free trial to the Research Wizard today.
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: http://www.zacks.com/performance.