Back to top

Analyst Blog

Picking up estimate-beating stocks is any investor’s dream. After all, this is the time when investors get to know which stock to settle on and which ones to walk out on, based on a company’s earnings scorecard. 

While appraising earnings performance, there are various factors investors normally take a look at. But among them, earnings beat seems to be the most intriguing driver of stock movement other than factors like earnings growth or acceleration.

Inside Earnings Beat

Investors normally look to position themselves ahead of time and hunt for stocks that are likely to spring up an astounding performance. After much brainstorming, Wall Street analysts project earnings of companies. These estimates act as investment leads.

A positive earnings surprise or earnings beat is typically the case when actual or reported earnings come in above the consensus estimate. Historically, if a company’s earnings manage to beat market expectations, its stock surges post release.

What Makes Earnings Beat Superior to Earnings Growth

A 20% earnings rise (though apparently looks good) doesn’t tell you everything about the company’s performance. This might represent a decelerating earnings growth momentum over the years or quarters, raising questions over the company’s fundamentals.

Also, seasonal fluctuations come into play. If a company’s Q1 is seasonally weak and Q4 is 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.

On the other hand, analysts combine their understanding and a company’s guidance when formulating an earnings estimate. So, if a company’s earnings outperform that estimate, it will be almost equivalent to surpassing its own expectation as well as market perception. Of course, this gives you a clear picture of the company’s bottom line.

How to Find Those Star Performers?

Now, since it is tough to foresee if a company will beat or miss in the upcoming earnings release, investors can review the earnings surprise history. 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 have the same trick up its sleeve or in other words is smart enough to beat on earnings next time.

The Winning Strategy

In order to shortlist stocks that are likely to come up with an earnings surprise, we chose the followingas our primary screening parameters.

Last EPS Surprise greater than or equal to 10%: Stocks that delivered a 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 push up the chance of a positive surprise.

Zacks Rank less than or equal to 2: Only companies with a Zacks Rank #1 (Strong Buy) and Zacks Rank #2 (Buy) rating can get through. You can see the complete list of today’s Zacks #1 Rank stocks here.

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 to happen, as 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 16.

Here are five out of the 16 stocks:

McDermott International Inc. (MDR - Free Report) : The company is into energy services business and has a Zacks Rank #1. The Zacks Industry Rank of the stock is in the top 29%.

NVIDIA Corporation (NVDA - Free Report) : The company offers digital media processors and related software for a wide range of visual computing platforms and has a Zacks Rank #1. The Zacks Industry Rank of the stock is in the top 6%.

Nxstage Medical Inc.  (NXTM - Free Report) : This is a medical device company with a Zacks Rank #1. The Zacks Industry Rank of the stock is in the top 25%.

Melco Crown Entertainment Limited (MPEL - Free Report) : This is a casino gaming company with a Zacks Industry Rank within the top 24%. It has a Zacks Rank #1.

Anika Therapeutics Inc. (ANIK - Free Report) : This Zacks Rank #1 company manufactures and commercializes therapeutic products and devices. Its Zacks Industry Rank is within the top 33%.

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: https://www.zacks.com/performance.

Zacks Restaurant Recommendations: In addition to dining at these special places, you can feast on their stock shares. A Zacks Special Report spotlights 5 recent IPOs to watch plus 2 stocks that offer immediate promise in a booming sector. Download it free »