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 tap stocks that are high-quality in nature.
lululemon athletica LULU, PVH PVH, Sirius XM (SIRI), Marathon Oil MRO and The Interpublic Group of Companies IPG are some of the stocks that could win from the likely EPS surprise.
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 8.
Here are the five stocks that passed the screen:
lululemon athletica: The yoga-inspired athletic apparel company creates lifestyle components. Lululemon designs, manufactures and distributes athletic apparel and accessories for women, men and female youth.
Lululemon athleticahas a Zacks Rank #2.You can see the complete list of today’s Zacks #1 Rank stocks here.
PVH: PVH Corp specializes in designing and marketing branded dress shirts, neckwear, sportswear, jeanswear, intimate apparel, swim products, footwear, handbags and related products.
PVH Corp. carries a Zacks Rank #1. PVH's brands are sold globally at various price points and in channels of distribution.
Sirius XM: The Zacks Rank #1 radio broadcasting company creates and broadcasts a variety of content such as commercial-free music, premier sports and live events, news and comedy and exclusive talk and entertainment shows. Sirius XM provides radio services to users in the United States and Canada.
Marathon Oil:The Zacks Rank #1 company is a leading oil and natural gas exploration and production company with operations in the United States and Africa.
As of the end of 2020, Marathon Oil had approximately 972 million oil-equivalent barrels in net proved reserves (52% crude oil/condensate and 69% proved developed), with 86% was located in the United States.
The Interpublic Group of Companies: The Zacks Rank #2 company with its subsidiaries, provides advertising and marketing services worldwide.
Interpublic specializes in consumer advertising, digital marketing, public relations, communications planning and media buying, and specialized communications disciplines.
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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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