It is earnings season again!
While this season brings the potential for big moves, investors are presented with a very delicate situation thanks to recent market volatility. Major market averages are all down considerably off their highs. The bounce since Christmas Eve has been swift and rewarding. But how long will it last with the backdrop of slowing global growth, an extended government shutdown, and trade wars?
To be fair, most stocks have come off their highs, but blindly buying the dip has not been a recipe for success recently. Utilities and Consumer Goods sectors have lagged the broad market while Conglomerates, Services and Financials are leading the way for investors this time around. That means that the dart-board approach is not going to work for you this earnings season. You are going to have to choose your investments wisely.
In the current stock market environment, investors need to focus on companies with the best fundamentals in order to find the big winners this earnings season.
One way to uncover them ahead of time is with our proprietary system called ‘Earnings ESP’ (Expected Surprise Prediction) which can assist you in uncovering these huge winners before they report earnings.
So if you want to increase your odds of success this earnings season—and who wouldn’t, given the market backdrop?—then this is one metric you need to know.
The Crystal Ball of Earnings Season
While it is impossible to know with complete certainty which stocks will deliver positive surprises this earnings season and which ones will disappoint, our proprietary Earnings ESP system determines which stocks have the best chance to surprise with their next earnings announcement. This method predicts earnings surprises with more than 80% accuracy.
The Earnings ESP is simply the percentage difference between the 'Most Accurate Estimate' and the 'Zacks Consensus Estimate' for a company's upcoming earnings per share number:
Earnings ESP = (Most Accurate Estimate / Zacks Consensus Estimate) -1
The most accurate estimate is the consensus of earnings estimates from analysts over the last 30 days. The Zacks Consensus Estimate, on the other hand, takes the consensus of all analysts’ estimates for the quarter, even if that estimate hasn't been revised in three months.
More . . .
Advance Notice of Positive Earnings Surprises
Zacks' research breakthrough now predicts with 80% precision which companies will beat earnings expectations before their reports are released. So you could beat Wall Street to the punch by getting into stocks before positive surprises potentially drive up their prices. This can lead to double-digit gains in as little as 1 day.
Which stocks is it picking now? You can find out until Sunday, January 27.
See Surprise Stocks Today >>
Timeliness Is Critical
The underlying concept here is that the most recent analyst estimate revisions are usually the most accurate. Think about it – if an analyst revises his earnings estimate right before an earnings release, he is likely using fresh information that will lead to a more accurate estimate than what analysts predicted two or three months ago.
Just like with a weather forecast that is more accurate for tomorrow than when trying to predict the weather three months from now, the more accurate estimates will usually be the ones that have all the most recent information at their disposal.
For example, let’s say specialty retailer XYZ Corp reports earnings next week. The Zacks Consensus Estimate for the coming quarter is comprised of eight analysts’ estimates and is $0.75. However, three analysts have increased their earnings estimates for XYZ Corp within the last 30 days.
Perhaps these analysts have recently visited stores and measured traffic, spoken with suppliers, surveyed customers or incorporated recent economic data into their earnings models. The consensus among these recent estimates is $0.78. That would give XYZ Corp an Earnings ESP of 4% ($0.78/$0.75). This company is likely to deliver a positive earnings surprise.
While not all companies that deliver positive earnings surprises will see their stock price rise, studies show that, on average, companies that deliver solid beats see excess returns in their share price for several weeks following the report. This is known as the post-earnings-announcement drift. And finding these stocks before they beat, and then holding them in this ‘drift’ period, can really boost your returns.
Despite several headwinds facing the market, there are bound to be plenty of large positive surprises this quarter. Utilizing Zacks’ Earnings ESP system can greatly increase your odds of finding these big winners before they report.
How Can the Earnings ESP Work for You?
You could start your stock search with this metric. The problem is that in each earnings season, including now, there are hundreds of stocks with positive ESPs.
That is why our Zacks research team created a special strategy that uses additional filters to narrow down the lists. It detects rare companies that are most likely to both beat earnings and jump in price. This drives the portfolio I am managing called the Surprise Trader.
I can't share all the details of its formula with you, but it relies on two under-used criteria coming from the brokerage analyst community. These two factors are then layered on top of other time-tested elements such as the Zacks Rank and Zacks Industry Rank to find only the best stocks in the best industries.
This is a significant research breakthrough, and it predicts positive earnings surprises before they are reported, with documented 80% accuracy. It offers you the chance to beat Wall Street to the punch by getting in early on price pops that can follow positive surprises.
In fact, our Surprise Trader portfolio recently closed gains of +40.7%, +16.7%, +29.6%, +28.1%, and +13.6% in as little as 4 days.1
So if you would like to pursue quick, substantial gains this earnings season, and are ready to move on the flurry of positive surprises we’re turning up, then I invite you to join us.
As a bonus, you are invited to download our "Early Warning Alert" report free. It reveals Stocks to Sell Before They Report Earnings in the Coming Week. Our strategy works both ways, and you can use this report to avoid companies that are likely to report the worst negative surprises from January 28 - February 1.
But don't delay. We can't let too many share our "surprise" recommendations so they are generally closed to the public. Today the portfolio is briefly open again, but your chance to gain access ends midnight Sunday, January 27.
Look into the Zacks Surprise Trader now >>
Dave Bartosiak is Zacks' resident earnings surprise and momentum expert. He selects stocks and delivers daily commentary for our Surprise Trader portfolio.
¹ The results for the companies listed above are not (or may not be) representative of the performance of all selections made by Zacks Investment Research's newsletter editors.