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 position 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 seven.
Here are five out of the seven stocks:
Crocs Inc. (CROX - Free Report) : This Zacks Rank #1 company is a world leader in innovative casual footwear for men, women and children. The stock comes from a top-ranked Zacks industry (top 21%). You can see the complete list of today’s Zacks #1 Rank stocks here.
Skechers U.S.A. Inc. (SKX - Free Report) : This Zacks Rank #1 company designs, develops and markets a diverse range of lifestyle footwear for men, women and children, as well as performance footwear for men and women. The stock comes from a top-ranked Zacks industry (top 24%).
Tandem Diabetes Care Inc. (TNDM - Free Report) : This medical device company holds a Zacks Rank #2. The stock comes from a top-ranked Zacks industry (top 33%).
CyberArk Software Ltd. (CYBR - Free Report) : This Zacks Rank #2 company provides information technology security solutions. The stock comes from a top-ranked Zacks industry (top 13%).
Fortinet Inc. (FTNT - Free Report) : This is a provider of network security appliances and Unified Threat Management network security solutions to enterprises, service providers and government entities worldwide. The company carries a Zacks Rank #2. The stock belongs to a top-ranked Zacks industry (top 13%).
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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.