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Positive Earnings ESP and Zacks Rank #1 or #2 boosts odds of upside earnings surprise.
Consistent EPS beats and solid growth outlook make these stocks worth watching.
It is not surprising that before an earnings season, every investor looks for stocks that can beat market expectations. This is because investors always try to position themselves ahead of time and look to tap stocks that are high-quality in nature.
In this regard, we ran a screener that yielded stocks Kennametal (KMT - Free Report) , Reddit Inc. (RDDT - Free Report) , Valero Energy (VLO - Free Report) and PIPER SANDLR CP (PIPR - Free Report) as the likely winners on the earnings beat potential.
Why Is a Positive Earnings Surprise So Important?
Historically, stocks of companies with solid quarterly earnings (on a nominal basis) tank if they miss or merely meet market expectations. After all, a 20% earnings rise (though apparently looks good) doesn’t tell you if earnings growth has been exhibiting a decelerating trend.
Also, seasonal fluctuations come into play sometimes. If a company’s Q1 is seasonally weak and Q4 strong, then it is likely to report a sequential earnings decline. In such cases, growth rates are misleading when judging the true health of a company.
On the other hand, after much brainstorming and analysis of companies’ financials and initiatives, Wall Street analysts project the earnings of companies. They, in fact, club their insights and a company’s guidance when deriving an earnings estimate.
Thus, outperforming that estimate is almost equivalent to beating the company’s own expectation as well as the market perception. And if the margin of earnings surprise is big, it typically drives the stock higher right after the release. Thus, more than anything else, an earnings surprise can push a stock higher.
How to Find Stocks that Can Beat?
Now, finding stocks that have the potential to beat on the bottom line may be investors’ dream, but not an easy job. One way to do this is to look at the earnings surprise history of the company.
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 apply the same secret sauce to execute yet another earnings beat 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 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 slightly 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 only four.
Here are all four stocks:
Kennametal: The Zacks Rank #1 company is a manufacturer, marketer and distributor of high-speed metal cutting tools, tooling systems and wear-resistant parts. You can see the complete list of today’s Zacks #1 Rank stocks here.
The average earnings surprise of KMT for the past four quarters is 35.43%.
Reddit: The company is a social media and community-led platform that enables real-time discovery, conversation and engagement across a wide range of interest-based forums. The RDDT stock has a Zacks Rank #2.
The average earnings surprise of RDDT for the past four quarters is 188.78%.
Valero Energy: The Zacks Rank #1 company is the largest independent refiner and marketer of petroleum products in the United States.
The average earnings surprise of VLO for the past four quarters is 45.37%.
PIPER SANDLR CP: The company is a focused securities firm dedicated to delivering superior financial advice, investment products and transaction execution within selected sectors of the financial services marketplace. The stock has a Zacks Rank #2.
The average earnings surprise of PIPR for the past four quarters is 48.02%.
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Looking for Earnings Beat? Buy These 4 Top-Ranked Stocks
Key Takeaways
It is not surprising that before an earnings season, every investor looks for stocks that can beat market expectations. This is because investors always try to position themselves ahead of time and look to tap stocks that are high-quality in nature.
In this regard, we ran a screener that yielded stocks Kennametal (KMT - Free Report) , Reddit Inc. (RDDT - Free Report) , Valero Energy (VLO - Free Report) and PIPER SANDLR CP (PIPR - Free Report) as the likely winners on the earnings beat potential.
Why Is a Positive Earnings Surprise So Important?
Historically, stocks of companies with solid quarterly earnings (on a nominal basis) tank if they miss or merely meet market expectations. After all, a 20% earnings rise (though apparently looks good) doesn’t tell you if earnings growth has been exhibiting a decelerating trend.
Also, seasonal fluctuations come into play sometimes. If a company’s Q1 is seasonally weak and Q4 strong, then it is likely to report a sequential earnings decline. In such cases, growth rates are misleading when judging the true health of a company.
On the other hand, after much brainstorming and analysis of companies’ financials and initiatives, Wall Street analysts project the earnings of companies. They, in fact, club their insights and a company’s guidance when deriving an earnings estimate.
Thus, outperforming that estimate is almost equivalent to beating the company’s own expectation as well as the market perception. And if the margin of earnings surprise is big, it typically drives the stock higher right after the release. Thus, more than anything else, an earnings surprise can push a stock higher.
How to Find Stocks that Can Beat?
Now, finding stocks that have the potential to beat on the bottom line may be investors’ dream, but not an easy job. One way to do this is to look at the earnings surprise history of the company.
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 apply the same secret sauce to execute yet another earnings beat 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 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 slightly 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 only four.
Here are all four stocks:
Kennametal: The Zacks Rank #1 company is a manufacturer, marketer and distributor of high-speed metal cutting tools, tooling systems and wear-resistant parts. You can see the complete list of today’s Zacks #1 Rank stocks here.
The average earnings surprise of KMT for the past four quarters is 35.43%.
Reddit: The company is a social media and community-led platform that enables real-time discovery, conversation and engagement across a wide range of interest-based forums. The RDDT stock has a Zacks Rank #2.
The average earnings surprise of RDDT for the past four quarters is 188.78%.
Valero Energy: The Zacks Rank #1 company is the largest independent refiner and marketer of petroleum products in the United States.
The average earnings surprise of VLO for the past four quarters is 45.37%.
PIPER SANDLR CP: The company is a focused securities firm dedicated to delivering superior financial advice, investment products and transaction execution within selected sectors of the financial services marketplace. The stock has a Zacks Rank #2.
The average earnings surprise of PIPR for the past four quarters is 48.02%.