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It is not surprising that prior to the start of every earnings season, investors look 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, which gave us Block (SQ - Free Report) , Advanced Drainage Systems (WMS - Free Report) , Wingstop (WING - Free Report) , The Gap and NVIDIA (NVDA - Free Report) as the likely winners on their 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 while 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. Investors generally believe that the company will apply the same secret sauce to execute yet another earning 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 have narrowed down the universe from over 7,700 stocks to only 18.
Here are five out of the 18 stocks:
Block: This Zacks Rank #1 company offers financial and marketing services through its comprehensive commerce ecosystem that helps sellers start, run and grow their businesses. You can see the complete list of today’s Zacks #1 Rank stocks here.
The average earnings surprise of SQ for the past four quarters is 10.76%.
Advanced Drainage Systems: This Zacks Rank #1 company is a manufacturer of thermoplastic corrugated pipe, providing a comprehensive suite of water management products and drainage solutions for use in the construction and infrastructure marketplace.
The average earnings surprise of WMS for the past four quarters is 37.07%.
Wingstop: It franchises and operates restaurants. The company's operating segment consists of Franchise and Company. The stock has a Zacks Rank #2.
The average earnings surprise of WING for the past four quarters is 21.25%.
The Gap: This Zacks Rank #1 company is a premier international specialty retailer offering a diverse range of clothing, accessories and personal care products.
The average earnings surprise of GPS for the past four quarters is 137.89%.
NVIDIA: This Zacks Rank #1 company is the worldwide leader in visual computing technologies and the inventor of the graphic processing unit or GPU. Over the years, the company’s focus has evolved from PC graphics to artificial intelligence-based solutions that now support high-performance computing, gaming and virtual reality platforms.
The average earnings surprise of NVDA for the past four quarters is 20.18%.
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.
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.
Image: Bigstock
5 Top-Ranked Stocks Likely to Beat on Earnings
It is not surprising that prior to the start of every earnings season, investors look 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, which gave us Block (SQ - Free Report) , Advanced Drainage Systems (WMS - Free Report) , Wingstop (WING - Free Report) , The Gap and NVIDIA (NVDA - Free Report) as the likely winners on their 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 while 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. Investors generally believe that the company will apply the same secret sauce to execute yet another earning 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 have narrowed down the universe from over 7,700 stocks to only 18.
Here are five out of the 18 stocks:
Block: This Zacks Rank #1 company offers financial and marketing services through its comprehensive commerce ecosystem that helps sellers start, run and grow their businesses. You can see the complete list of today’s Zacks #1 Rank stocks here.
The average earnings surprise of SQ for the past four quarters is 10.76%.
Advanced Drainage Systems: This Zacks Rank #1 company is a manufacturer of thermoplastic corrugated pipe, providing a comprehensive suite of water management products and drainage solutions for use in the construction and infrastructure marketplace.
The average earnings surprise of WMS for the past four quarters is 37.07%.
Wingstop: It franchises and operates restaurants. The company's operating segment consists of Franchise and Company. The stock has a Zacks Rank #2.
The average earnings surprise of WING for the past four quarters is 21.25%.
The Gap: This Zacks Rank #1 company is a premier international specialty retailer offering a diverse range of clothing, accessories and personal care products.
The average earnings surprise of GPS for the past four quarters is 137.89%.
NVIDIA: This Zacks Rank #1 company is the worldwide leader in visual computing technologies and the inventor of the graphic processing unit or GPU. Over the years, the company’s focus has evolved from PC graphics to artificial intelligence-based solutions that now support high-performance computing, gaming and virtual reality platforms.
The average earnings surprise of NVDA for the past four quarters is 20.18%.
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: http://www.zacks.com/performance.