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The fourth-quarter earnings season has been reasonably well for 13 out of 16 Zacks categorized sectors, with overall earnings up +5.8% from the same period last year on +4.5% higher revenues. As per the latest Zacks Earnings Outlook, this growth rate is much better than +2.8% earnings growth on +2.0% revenue growth for this same group of companies in the third quarter.

Notably, 319 S&P 500 members (76.3% of the index’s total membership) have already reported their results. Of this, 69.6% stocks have beat earnings estimates and 54.5% have come ahead of revenue expectations. However, positive surprises are tracking below the 75.5% and 58.9% earnings and revenue beat percentages for this same group of companies in the preceding quarter, respectively.

Overall, earnings are now anticipated to grow +7.3% on +3.9% higher revenues on a year-over-year basis. The anticipated figures mark a solid improvement over the third quarter earnings growth of 3.7% on the back of 2.2% higher revenues. Moreover, the earnings growth figure is the highest since the fourth quarter of 2014.

Technology: A Standout Sector in Q4

Technology has been one of the standout sectors in the fourth quarter. Almost 86.1% of the sector’s total market capitalization has already reported. Total earnings for these companies are up +7.8% from the same period last year on +6.0% higher revenues, with 70.5% beating EPS estimates and 75% beating revenue estimates.

The strong growth reflected solid performance from industry giants like Intel Corp, Microsoft (MSFT - Free Report) and Alphabet (GOOGL - Free Report) . Contrary to the third quarter, Apple’s (AAPL - Free Report) big earnings beat also helped results this time.

The rapid adoption of cloud was the common growth factor for these companies. Additionally, growing acceptance of artificial intelligence (AI) technology, personal assistants and Internet of Things (IoT) drove overall results.

We believe the rapid adoption of cloud-based technologies will be the key catalyst going ahead. Per IDC, IT spending on cloud infrastructure – servers, enterprise storage, and Ethernet switches for the enterprise private cloud and co-location services – will increase 18.2% in 2017 to $44.2 billion. The growth rate is particularly noticeable when compared with spending on traditional IT, which is expected to decline 3.3% in 2017.

How to Make the Right Pick?

With the existence of a number of industry players, finding the right stocks that have the potential to beat earnings could be a daunting task. Our proprietary methodology, however, makes it fairly simple for you. You could narrow down the list of choices by looking at stocks that have the combination of a favorable Zacks Rank #1 (Strong Buy), 2 (Buy) or 3 (Hold) and a positive Earnings ESP.

Earnings ESP is our proprietary methodology for determining stocks that have the best chance to surprise with their next earnings announcement. It provides the percentage difference between the Most Accurate estimate and the Zacks Consensus Estimate.
 
Our research shows that for stocks with this combination, the chance of a positive earnings surprise is as high as 70%.
 
Our Choices
 
Given below are four technology providers that have the right combination of elements to post an earnings beat this quarter:

Applied Optoelectronics Inc. (AAOI - Free Report) – Sugar Land, TX-based Applied Optoelectronics designs, develops and manufactures advanced optical devices, packaged optical components, optical subsystems, laser transmitters and fiber optic transceivers.

We note that the company has beaten the Zacks Consensus Estimate in two out of preceding four quarters, with an average positive earnings surprise of 106.74%.

The company is expected to report fourth-quarter 2016 results on Feb 23. Currently, Applied Optoelectronics has an Earnings ESP of +15.87% and carries a Zacks Rank #1.  You can see the complete list of today’s Zacks #1 Rank stocks here.

NII Holdings Inc. – Reston, VA-based NII provides differentiated mobile communication services for businesses and consumers under the Nextel brand primarily in Brazil and Argentina.

We note that the company has beaten the Zacks Consensus Estimate in three out of preceding four quarters, with an average positive earnings surprise of 6.98%.

This Zacks Rank #2 stock has an Earnings ESP of +43.48%. The company is set to report fourth-quarter 2016 results on Mar 9, 2017.

ARRIS International plc (ARRS - Free Report) – Suwanee, GA- based ARRIS is a global technology leader in the development of advanced cable telephony, next-generation high-speed data network, demand-driven video solutions, operations software, and broadband access equipment.

ARRIS strong product portfolio is a key catalyst. Moreover, expansion in strategic relationships with the likes of Telefonica is positive in our view. Notably, the company has beaten the Zacks Consensus Estimate in three out of preceding four quarters, with an average positive earnings surprise of 21.33%.

This Zacks Rank #2 stock has an Earnings ESP of +1.56%. The company is set to report fourth-quarter 2016 results on Feb 22.

GoDaddy Inc. (GDDY - Free Report) – Headquartered in Scottsdale, AZ, GoDaddy is engaged in the designing and development of cloud-based technology products for small businesses, Web design professionals and individuals.

The company’s strong market position, increasing investments in products, technology platform and customer care should boost fourth-quarter results. We note that the company has beaten the Zacks Consensus Estimate in three out of preceding four quarters, with an average positive earnings surprise of 43.34%.

This Zacks Rank #3 stock has an Earnings ESP of +12.5%. The company is set to report fourth-quarter 2016 results on Feb 15.


Zacks' Top 10 Stocks for 2017

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