Gone are the days when investors were satisfied simply with just earnings growth. Now, earnings improvement (no matter how big it is) seems inadequate for solid moves in the market. It is the “BEAT” that matters the most.
What is Earnings Beat?
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.
This is because investors always try to take positions ahead of time and look for stocks that are likely to come up with a stellar performance. Now, since Wall Street analysts project earnings of companies after much deliberation, their estimates act as investment leads.
Why to Give Earnings Beat So Much of Precedence?
After all, only earnings beat can give investors a clear picture of a company’s strength when an industry-wide earnings recession is felt.
Also, 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 at times. 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 put together their insights and a company’s guidance when giving an earnings estimate. Thus, outperforming that estimate is almost equivalent to beating the company’s own expectation as well as market perception.
How to Find Stocks that Can Beat?
Now, since it is difficult to foretell if a company will beat or miss in the upcoming earnings season, investors can check 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 consistency in surpassing 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 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 followingas our primary screening parameters.
Last EPS Surprise greater than or equal to 10%: Stocks that delivered a positive surprise in the last quarter are likely 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 equal to 2: Only companies with a Zacks Rank #1 (Strong Buy) or 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 stock has adequate liquidity.
A handful of criteria narrowed down the universe from over 7,700 stocks to 18.
Here are five out of the 18 stocks:
The Chemours Company (CC - Free Report) : This Zacks Rank #1company is engaged in chemical business. The Zacks Industry Rank of the stock is in the top 33%.
Matador Resources Company (MTDR - Free Report) : This Zacks Rank #2 energy company is engaged in the exploration and development of oil and natural gas resources. The Zacks Industry Rank of the stock is in the top 28%.
Best Buy Co. Inc. (BBY - Free Report) : The company sells personal computers, consumer electronics, major appliances and related accessories mainly through its retail stores. The Zacks Industry Rank of the stock is in the top 38%. Best Buysports a Zacks Rank #1.
Anika Therapeutics Inc. (ANIK - Free Report) : This Zacks Rank #2 company is into manufacturing and commercialization of therapeutic products. The Zacks Industry Rank of the stock is in the top 26%.
McDermott International Inc. (MDR - Free Report) : This is a provider of engineering, construction and module fabrication services for upstream field developments. The company carries a Zacks Rank #1. The Zacks Industry Rank of the stock is in the top 21%.
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.
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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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