Everyone is probably in search of earning beat this reporting cycle. Out of 350 tickers of the S&P 500 index that have reported already, 74% beat on bottom line and 68% surpassed revenue estimates, as per the Earnings Trends.
Growth appears slightly weaker than the prior period, but beat ratios emerged stronger. This spread an upbeat sentiment around corporate earnings this season as well as the broader market. No wonder, investors will look for more earnings beat in the coming days.
Why Is Earnings Surprise So Important?
A positive earnings surprise or beat is typically the case when actual or reported earnings come in higher than the consensus estimate. Historically, stocks of companies with solid quarterly earnings (on a nominal basis) tank if they miss or merely meet market expectations.
After all, a 10% earnings rise (though apparently looks good) doesn’t tell you everything about the company. This growth may be decelerating over the years or quarters, raising questions over the company’s fundamentals.
Also, seasonal fluctuations come into the play sometimes. If any 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 apply their insights and consider a company’s guidance when forecasting its earnings estimate. As a result, beating that key number is almost equivalent to beating one’s own expectation as well as the market estimate. Needless to say, this gives you a better picture of the company’s bottom line. And if the margin of earnings surprise is big, it typically sends the stock skyrocketing immediately after the release.
Also, a history of positive earnings surprise generally works as a catalyst in sending a stock higher. It indicates the company’s ability to surpass the estimates. And investors generally believe that the company will apply the same trick or in other words is smart enough to beat on earnings in its next release.Hence, earnings surprise can be viewed as a key metric for share price outperformance.
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 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 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 11.
Here are five out of 11 stocks that passed the screen:
SP Plus Corporation (SP - Free Report) : The company provides professional parking, ground transportation, facility maintenance, security and event logistics services to property owners and managers in all markets of the real estate industry. The stock belongs to a Zacks Industry Rank in the top 36%. It has a Zacks Rank #2.
Inogen Inc. (INGN - Free Report) : This medical technology company belongs to a Zacks Industry Rank is in the top 43%. It sports a Zacks Rank #1.
Graco Inc. (GGG - Free Report) : This supplier of technology and expertise for the management of fluids in both industrial and commercial settings carries a Zacks Rank #2. The Zacks Industry Rank of the stock is in the top 25%.
Sterling Construction Company Inc. (STRL - Free Report) : This holding company, which has historically operated as a wholesale distributor to the automotive aftermarket and construction, flaunts a Zacks Rank #1. The Zacks Industry Rank of the stock is in the top 11%.
FireEye Inc. (FEYE - Free Report) :The company provides security platform for cyber-attacks to enterprises and governments. The stock has a Zacks Rank #2 and the Zacks Industry Rank is in 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.
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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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