Looking for Earnings Beat? Buy These 5 Stocks With Potential
There is no mystery in investors’ hunt for stocks with estimate-beating potential before an earnings release. This is because investors always try to place themselves ahead of time and look to play stocks that are rich in quality.
We have applied a screener to land on such winning stocks. These include Chewy CHWY, Progyny PGNY, KnowBe4 KNBE, Chegg CHGG and Fortinet FTNT.
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.
Meanwhile, 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 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 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 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 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 raise 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, 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 eight.
Here are five out of eight stocks:
Chewy CHWY: Chewy Inc. operates as an online pet retailer. The stock carries a Zacks Rank #2. You can see the complete list of today’s Zacks #1 Rank stocks here.
The average earnings surprise of CHWY for the past four quarters is 82.59%.
Progyny PGNY: The company is engaged in fertility benefits management. It specializes in fertility and family-building benefits solutions. It has a Zacks Rank #2.
The average earnings surprise of PGNY for the past four quarters is 233.75%.
KnowBe4 KNBE: The Zacks Rank #1 company is a provider of security awareness platform.
The average earnings surprise of KNBE for the past four quarters is 216.67%.
Chegg CHGG: The company provides a social education platform. It has a Zacks Rank #2.
The average earnings surprise of CHGG for the past four quarters is 28.18%.
Fortinet FTNT: The company is a provider of network security appliances and Unified Threat Management network security solutions to enterprises, service providers and government entities worldwide. It has a Zacks Rank #2.
The average earnings surprise of FTNT for the past four quarters is 14.55%.
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.
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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.
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Fortinet, Inc. (FTNT) : Free Stock Analysis Report
Chegg, Inc. (CHGG) : Free Stock Analysis Report
Chewy (CHWY) : Free Stock Analysis Report
Progyny, Inc. (PGNY) : Free Stock Analysis Report
KnowBe4, Inc. (KNBE) : Free Stock Analysis Report
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