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Stock Picking Strategy to Win Every Earnings Season

The first-quarter 2016 earnings season is about to get going amidst expectations of all-around weakness. In fact, the bar seems to have been set exceptionally low this time around, with companies witnessing record negative estimate revisions. However, this has two ramifications for stocks that most investors don’t think about.

One, this will make it much easier for companies to beat expectations. Two, it seems reasonable to assume that most of the negativity has already been priced in.

So, today we are going to focus on a screen which will help you find companies which are likely to post positive earnings surprises this quarter.

This will help investors leverage the price increase, the “post-earnings-announcement drift” that companies reporting earnings beats enjoy. Although not all companies that post positive earnings surprises see their stock price appreciate, studies indicate that, on an average, earnings beats drive strong returns for several weeks following the report.

We have used our proprietary Earnings ESP system to single out companies that have the potential to beat estimates this season.

However, this screen focuses on more than just earnings surprises to ensure minting a few extra dollars during every earnings season. To that end, we have also paid heed to the relevance of sales surprises, and how they provide a glimpse into a company’s future prospects.

We all know that a company’s bottom line number is the primary driver of its stock price. But there is also a fundamental fact that is often ignored — revenues drive earnings.

Companies have jacked up earnings for years by slashing costs. But earnings advancement based on cost cutting doesn't last very long. It is only sales growth that can drive sustainable earnings momentum over the long term. So, the strategy considers those stocks that have posted solid sales beats in the last quarter, and have also outperformed their peers in terms of sales surprises in recent times.

With Alcoa Inc.’s (AA) earnings report kicking off the first-quarter earnings season yesterday, it’s the right time to get into some good companies that are likely to report earnings beats.

Screening Parameters

The screen we are running includes the following parameters:

  • Zacks Rank of 1(Strong Buy) or 2 (Buy) (Only buy-ranked stocks can get through the screen)
  • Last EPS Surprise greater than or equal to 5% (Stocks posting positive surprises have a tendency of surprising again)
  • Average 4-quarter EPS Surprise greater than 5% (It will shortlist stocks with an impressive history of beating estimates in the past four quarters)
  • Earnings ESP greater than or equal to zero (It helps in finding stocks for which the chance of beating estimates in the upcoming release is high)
  • Last Sales Surprise greater than or equal to 5% (A positive sales surprise shows top-line strength. Also, a company that has surprised in the past is more likely to surprise again in the future)
  • Sales Surprise for the last 9 quarters greater than or equal to X Industry Median (It shortlists companies that have posted higher sales surprises than their peers, on an average over the last 9 quarters)
  • Price greater than or equal to $5, Average 20-day Volume greater than or equal to 100,000 (It screens stocks that are easily tradable)
  • Market Capitalization greater than $100 million (This helps us to focus on companies that have strong liquidity)

Here are 5 stocks that meet these criteria:

Calpine Corp. (CPN)

Vail Resorts Inc. (MTN)

Inogen, Inc. (INGN)

Sagent Pharmaceuticals, Inc. (SGNT)

PFSweb Inc. (PFSW)

All of these companies reported positive earnings and sales surprises their last time out, and we expect more of the same this time around as well. So, do keep a watch on the screen to find out the winning stocks this earnings season.

The Research Wizard is a great place to begin. It's easy to use. Everythingis in plain language. And it's very intuitive. Start your trial to the Research Wizard 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: http://www.zacks.com/performance

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CALPINE CORP (CPN): Free Stock Analysis Report
 
PFSWEB INC (PFSW): Free Stock Analysis Report
 
VAIL RESORTS (MTN): Free Stock Analysis Report
 
INOGEN INC (INGN): Free Stock Analysis Report
 
SAGENT PHARMA (SGNT): Free Stock Analysis Report
 
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