5 Top-Ranked Stocks to Tap Earnings Beat Potential
Zacks Equity Research
Updated
Equity investors are all attentive before an earnings release. This is because earnings apparently indicate a company’s financial health. No wonder, solid earnings growth speaks about business well-being, but there is another metric which is gaining attention lately, i.e. positive earnings surprise or earnings beat. Let’s tell you why it is so important.
What is Earnings Beat?
Investors always try to position themselves ahead of time and look for stocks that are likely to come up with a stellar performance. After much brainstorming, Wall Street analysts project earnings of companies. These estimates act as investment leads.
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.
Why Earnings Beat is Superior to Earnings Growth?
A 20% earnings rise (though apparently looks good) doesn’t tell you everything about the company. This might represent a decelerating earnings growth momentum over the years or quarters, raising questions over the company’s fundamentals.
Also, seasonal fluctuations come into the play sometimes. 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. Of course, this gives you a clear picture of the company’s bottom line. And if the margin of earnings surprise is big, it typically drives the stock higher right after the release.
How to Find Stocks that Can Beat?
Now, since it is difficult to predict 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 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.
The Winning Strategy
In order to shortlist stocks that are likely to come up with an earnings surprise, we chose the followingas 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 narrowed down the universe from over 7,700 stocks to just nine.
Here are five out of the six stocks:
Potbelly Corporation PBPB: The company is a sandwich concept. It carries a Zacks Rank #2. The VGM score of the stock is ‘A.’ The stock has a Zacks Rank #2.
Inogen Inc. INGN: This is a medical technology company. It carries a Zacks Rank #2. The VGM score of the stock is ‘A.’ The stock has a Zacks Rank #1. You can see the complete list of today’s Zacks #1 Rank stocks here.
U.S. Silica Holdings Inc. SLCA: This producer of industrial minerals carries a Zacks Rank #2. It is in the top 38% of the Zacks Industry Rank. The stock has a Zacks Rank #2.
NextEra Energy Partners LP NEP: It is engaged in owning, operating and acquiring contracted clean energy projects. It is in the top 21% of the Zacks Industry Rank and has a VGM score of ‘A.’ The stock has a Zacks Rank #2.
Diamondback Energy Inc. FANG: It is an oil and natural gas company in the top 20% of the Zacks Industry Rank. The stock has a Zacks Rank #2.
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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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