Unsurprisingly, before an earnings season, every investor looks for stocks that can beat market expectations. This is because investors are always looking to position themselves ahead of time and tap into stocks that are inherently high-quality.
Why is a positive win surprise so important?
Historically, stocks of companies with solid quarterly earnings (on a nominal basis) fall when they miss or just meet market expectations. After all, a 20% increase in earnings (although it appears to be looking good) doesn’t tell you if earnings growth is on a slowing trend.
Seasonal fluctuations also sometimes come into play. If a company’s first quarter is seasonally weak and its fourth quarter is strong, it’s likely to report sequential earnings declines. In such cases, growth rates are misleading when it comes to judging a company’s true health.
On the other hand, after much brainstorming and analysis of companies’ financial metrics and initiatives, Wall Street analysts are forecasting corporate earnings. They actually combine their insights and running a business when deriving an earnings estimate.
Therefore, beating this estimate is almost tantamount to beating the company’s own expectations as well as market perception. And when the surprise margin is large, it usually drives the stock higher right after the release. Therefore, an earnings surprise can propel a stock higher than anything else.
How do you find stocks that can beat?
Well, finding stocks that have the potential to beat the bottom line may be investors’ dream, but it’s no easy feat. One way to do this is to look at the company’s earnings surprise history.
An impressive performance in this regard generally acts as a catalyst to send a stock higher. It shows the company’s ability to beat estimates. And investors generally believe the company will apply the same secret sauce to pull off another earnings punch in its next release.
The winning strategy
In order to shortlist stocks likely to deliver an earnings surprise, we have chosen the following criteria as our primary screening parameters.
Last EPS surprise greater than or equal to 10%: Stocks that surprised on the upside in the last quarter tend to surprise again.
Average EPS surprise over the last four quarters greater than 20%: We raised the bar for outperformance a bit by setting the average earnings surprise at 20% for the last four quarters.
Average EPS surprise over the last two quarters greater than 20%: This suggests a more consistent surprise history and makes the case for another surprise even stronger.
In addition, we place some other criteria that increase the chance of a positive surprise.
Zacks rank less than or equal to 2: Only companies with a Zacks rank of #1 (Strong Buy) or 2 (Buy) make it through.
Result ESP greater than zero: According to our proven model, a stock must have both a positive earnings ESP and a Zacks rank of #1, 2, or 3 for an earnings hit to occur.
In order to focus on those with long-term growth potential and high trading liquidity, we also added the following parameters:
Next 3-5 years Estimated EPS growth (per year) of more than 10%: The solid expected earnings growth shows the stock’s long-term growth prospects.
Average 20-day volume greater than 100,000: A high trading volume implies that the shares have sufficient liquidity.
A handful of criteria narrowed the universe from over 7,700 stocks to 11.
Here are five of 11 stocks:
Ulta Beauty ULTA: The Company offers a wide range of products including cosmetics, fragrances, skin care, hair care, bath and body products, and salon styling tools in stores. The stock carries a Zacks rank #2. You can see the full list of today’s Zacks #1 Rank stocks can be found here.
ULTA’s average earnings surprise for the trailing four quarters is 26.19%.
Inter Perfumes IPAR: Inter Parfums, Inc. is engaged in the manufacture, distribution and marketing of a wide range of fragrances and related products. It has a Zacks Rank #1.
IPAR’s average earnings surprise for the last four quarters is 36.23%.
InterDigital IDCC: The Zacks Rank #2 company is a pioneer in advanced mobile technologies that enable wireless communications and capabilities.
IDCC’s average earnings surprise for the last four quarters is 40.33%.
Portillo’s Inc. PTLO: Zacks Rank #2 company offers a fast-casual restaurant concept known for its menu of Chicago-style favorites.
PTLO’s average earnings surprise for the last four quarters is 90.63%.
MercadoLibre MELI: This Zacks Rank #1 company is one of the largest e-commerce platforms in Latin America. The company is an e-commerce leader in Brazil, Argentina, Colombia, Chile, Ecuador, Costa Rica, Peru, Mexico and Uruguay based on unique visitors and page views.
MELI’s average earnings surprise for the last four quarters is 21.95%.
You can get the rest of the stocks on this list by signing up for your two week free trial of Research Wizard now and using this screen in your own trading. In addition, you can also create your own strategies and test them first before taking the investment leap.
The research assistant is a great place to start. It’s easy to use. Everything in plain language. And it’s very intuitive. Start your Research Wizard trial today. And the next time you’re reading an economic report, open up the research assistant, plug in your finds, 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 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 mentioned in this material.
Disclosure: Performance information on Zacks portfolios and strategies is available at: https://www.zacks.com/performance.
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Ulta Beauty Inc. (ULTA): Free Stock Research Report
InterDigital, Inc. (IDCC): Free Stock Research Report
Inter Parfums, Inc. (IPAR): Free Stock Research Report
MercadoLibre, Inc. (MELI): Free Stock Research Report
Portillo’s Inc. (PTLO): Free Stock Research Report
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