Plain and simple earnings growth may no longer entice investors. 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 and leads one to a lucrative investment.
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 becauseinvestors always try to take positions ahead of time and look for stocks that are likely to come up with stellar performances. 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 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 following as our primary screening parameters.
Last EPS Surprise greater than or equal to 5%: Stocks delivering positive surprise in the last quarter tend to surprise again.
Average EPS Surprise in the last four quarters greater than 10%: 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 10%: 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) 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 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 5%: 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 narrowed down the universe from over 7,700 stocks to 13.
Here are five out of the 13 stocks:
Wynn Resorts Limited (WYNN - Free Report) : This Zacks Rank #1 company is engaged in the owning and operating of casino gaming and entertainment casino resorts. The Zacks Industry Rank of the stock is in the top 27%. You can see the complete list of today’s Zacks #1 Rank stocks here.
Hasbro Inc. (HAS - Free Report) : This Zacks Rank #2 company is a global leader in children's and family leisure time and entertainment products and services. The Zacks Industry Rank of the stock is in the top 42%.
Red Robin Gourmet Burgers Inc. (RRGB - Free Report) : This casual dining restaurant chain holds a Zacks Rank #1. The Zacks Industry Rank of the stock is in the top 37%.
Microchip Technology Inc (MCHP - Free Report) : This Zacks Rank #1 company develops and manufactures specialized semiconductor products. The Zacks Industry Rank of the stock is in the top 13%.
Parker-Hannifin Corporation (PH - Free Report) : This is a manufacturer of motion control products. The company carries a Zacks Rank #1. The Zacks Industry Rank of the stock is in the top 13%.
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 »