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Looking for an Earnings Surprise? Play These 5 Stocks

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Sanghamitra Saha
·5 min read
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It is not surprising that before an earnings season, every investor looks for stocks that can beat market expectation. This is because investors always try to position themselves ahead of time and look to tap stocks that are high-quality in nature.

What Makes Earnings Beat So Intriguing?

Historically, stocks of companies with solid quarterly earnings (on a nominal basis) fall if they miss or just come in line with market expectations. After all, a 20% earnings rise (though it looks good apparently) doesn’t tell you if earnings growth has been exhibiting a decelerating trend. If that is the case, the company’s fundamentals raise serious doubts.

Also, seasonal fluctuations are crucial in determining a company’s earnings growth. If a company’s Q1 is seasonally weak and its Q4 is strong, it is likely to report a sequential earnings decline in Q1. In such cases, growth rates are misleading when it comes to analyzing the true picture of a company.

On the other hand, Wall Street analysts rack their brains to study companies’ financials and initiatives to forecast earnings. They in fact club their insights and the company’s guidance to derive an earnings estimate.

Thus, beating this key number is almost equivalent to beating the company’s own expectation as well as the market perception. And if the margin of surprise is big, it typically drives the stock higher right after the release.

Now, since it is difficult to foretell if a company will beat or miss in the upcoming earnings season, investors can check its earnings surprise history. An impressive track record generally acts as a catalyst, sending the stock higher. It proves the company’s ability to surpass 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 as well.

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 EPS 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 surprise.

Zacks Rank less than or equal to 2: Only companies with a Zacks Rank of #1 (Strong Buy) or 2 (Buy) 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, 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 has narrowed down the universe from over 7,700 stocks to around 25.

Here are the five stocks that passed the screen:

Activision Blizzard Inc. ATVI: The company is a leading developer and publisher of console, online and mobile games and has a Zacks Rank #2.You can see the complete list of today’s Zacks #1 Rank stocks here.

Brinker International Inc. EAT: Brinker International primarily owns, operates, develops and franchises various restaurants under Chili’s Grill & Bar (Chili’s) and Maggiano’s Little Italy (Maggiano’s) brands. The stock carries a Zacks Rank #1. 

Five Below Inc. FIVE: This Zacks Rank #2 specialty value chain retailer provides a wide range of premium quality and trendy merchandise for $5 or below.

Hologic Inc. HOLX: The Zacks Rank #1 company develops, manufactures and supplies diagnostics, medical imaging systems and surgical products, which cater to the healthcare needs of women.

Owens Corning Inc OC: The Zacks Rank #2 company is a world leader in building materials systems and composite solutions.

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: https://www.zacks.com/performance.


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Activision Blizzard, Inc (ATVI) : Free Stock Analysis Report
 
Brinker International, Inc. (EAT) : Free Stock Analysis Report
 
Hologic, Inc. (HOLX) : Free Stock Analysis Report
 
Owens Corning Inc (OC) : Free Stock Analysis Report
 
Five Below, Inc. (FIVE) : Free Stock Analysis Report
 
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