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Buy 4 Top-Ranked Stocks to Play Likely Earnings Beat
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Prior to 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 into stocks that are of high quality.
In this regard, we ran a screener that yielded Norwegian Cruise Line Holdings Ltd. (NCLH - Free Report) , Eli Lilly (LLY - Free Report) , The Progressive (PGR - Free Report) and Fortinet (FTNT - Free Report) as the likely winners on the earnings beat potential.
Why is a Positive Earnings Surprise 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) does not tell you if earnings growth has been exhibiting a decelerating trend.
Also, seasonal fluctuations come into play sometimes. If a company’s first quarter is seasonally weak and its fourth quarter 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.
Then again, after much brainstorming and analysis of companies’ financials and initiatives, Wall Street analysts project 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 expectations and the market perception. And if the margin of earnings surprise is big, it typically drives the stock right after the release. Thus, more than anything else, an earnings surprise can push up a stock.
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 surprises 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.
We place a few other criteria that push up the chance of a positive surprise.
Zacks Rank less than or equal to 2 (Buy): 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 (Hold) for an earnings beat to happen, 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 a 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 more than 7,700 stocks to only 13.
The average earnings surprise of NCLH for the past four quarters is 5.67%.
Eli Lilly: It is one of the world’s largest pharmaceutical companies. LLY boasts a diversified product profile, including a solid lineup of new successful drugs. The companycurrently has a Zacks Rank #2.
The average earnings surprise of LLY for the past four quarters is 69.07%.
The Progressive:The Zacks Rank #2 company is a leading independent agency writer of private passenger auto coverage, and the market share leader for motorcycle products since 1998.
The average earnings surprise of PGR for the past four quarters is 24.08%.
Fortinet: The company’s solutions are designed to integrate multiple levels of security protection, including firewall, virtual private networking, antivirus, intrusion prevention, web filtering, anti-spam and wide area network acceleration. The stock has a Zacks Rank #2 at present.
The average earnings surprise of FTNT for the past four quarters is 20.40%.
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
Buy 4 Top-Ranked Stocks to Play Likely Earnings Beat
Prior to 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 into stocks that are of high quality.
In this regard, we ran a screener that yielded Norwegian Cruise Line Holdings Ltd. (NCLH - Free Report) , Eli Lilly (LLY - Free Report) , The Progressive (PGR - Free Report) and Fortinet (FTNT - Free Report) as the likely winners on the earnings beat potential.
Why is a Positive Earnings Surprise 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) does not tell you if earnings growth has been exhibiting a decelerating trend.
Also, seasonal fluctuations come into play sometimes. If a company’s first quarter is seasonally weak and its fourth quarter 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.
Then again, after much brainstorming and analysis of companies’ financials and initiatives, Wall Street analysts project 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 expectations and the market perception. And if the margin of earnings surprise is big, it typically drives the stock right after the release. Thus, more than anything else, an earnings surprise can push up a stock.
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 surprises 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.
We place a few other criteria that push up the chance of a positive surprise.
Zacks Rank less than or equal to 2 (Buy): 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 (Hold) for an earnings beat to happen, 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 a 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 more than 7,700 stocks to only 13.
Here are four out of those 13 stocks:
Norwegian Cruise Line: The Bermuda-based company, with a Zacks Rank #2 at present, is a leading cruise line operator. You can see the complete list of today’s Zacks #1 Rank stocks here.
The average earnings surprise of NCLH for the past four quarters is 5.67%.
Eli Lilly: It is one of the world’s largest pharmaceutical companies. LLY boasts a diversified product profile, including a solid lineup of new successful drugs. The companycurrently has a Zacks Rank #2.
The average earnings surprise of LLY for the past four quarters is 69.07%.
The Progressive:The Zacks Rank #2 company is a leading independent agency writer of private passenger auto coverage, and the market share leader for motorcycle products since 1998.
The average earnings surprise of PGR for the past four quarters is 24.08%.
Fortinet: The company’s solutions are designed to integrate multiple levels of security protection, including firewall, virtual private networking, antivirus, intrusion prevention, web filtering, anti-spam and wide area network acceleration. The stock has a Zacks Rank #2 at present.
The average earnings surprise of FTNT for the past four quarters is 20.40%.
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.