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Looking to Gain from Earnings Surprise? Buy These 4 Stocks

An earnings season is probably a most-watched period by equity investors. After all, investors decide on which stocks to pick and which one to kick out from their portfolios, depending on companies’ earnings performances. 

Now while evaluating earnings performance, there are various factors investors take into consideration. These are earnings growth, earnings acceleration and definitely earnings surprise.

As a matter of fact, an earnings beat or a positive earnings surprise seems to be a greater driver of stock movement these days than earnings growth (no matter how big it is) or earnings momentum. We’ll tell you why.

Earnings Surprise: A Key to Win

An earnings surprise is typically the case when actual or reported earnings come in above the consensus estimate. Historically, stocks of companies with solid quarterly earnings (on a nominal basis) tank if they miss or merely meet market expectations.

After all, a 10% earnings rise (though it apparently looks good) doesn’t tell you everything about the company. This growth may be decelerating over the years or quarters, raising questions over the company’s fundamentals.

Also, seasonal fluctuations come into the play sometimes. If any 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.

Similarly, earnings momentum over the quarters or years is definitely a sign of corporate well-being. Then again, this does not quantify the extent of the company’s operational efficiency.

On the other hand, analysts put together their insights and also consider a company’s guidance when giving an earnings estimate. Thus, scoring higher on that key number is almost equivalent to beating one’s own expectation as well as the market estimate. 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.

Now since it is difficult to foretell if a company will beat or miss in the upcoming earnings season, investors can check at the earnings surprise history. An impressive track record 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 to pull off an earnings 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 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 slight 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 equal to 1:Only companies with a Strong Buy rating can get through.

Earnings ESPgreater 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 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.

Just these few criteria narrows down the universe from over 7,700 stocks to around 7.

Here are four of the seven stocks that passed the screen:

Cablevision Systems Corporation (CVC)

Hasbro Inc. (HAS)

Dave & Buster's Entertainment Inc. (PLAY)

Wabash National Corp. (WNC)

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:

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WABASH NATIONAL (WNC): Free Stock Analysis Report
CABLEVISION SYS (CVC): Free Stock Analysis Report
DAVE&BUSTRS ENT (PLAY): Free Stock Analysis Report
HASBRO INC (HAS): Free Stock Analysis Report
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