Investors in stocks are all vigilant before the publication of results. This is because earnings appear to indicate the financial health of a business. There is no denying that strong earnings growth speaks to corporate wellness, but there is another factor that matters even more: the surprise of positive earnings or outperforming earnings. We will tell you why it is so important.
– Zacks
Notably, lululemon athletica LULU, AutoZone AZO, Chemours DC, The Goldman Sachs Group (GS) and Cross Country Medical Care CCRN is likely to post earnings on its next release.
What is Earnings Beat?
Investors always try to position themselves ahead of time and look for stocks that are likely to perform stellarly. After much brainstorming, Wall Street analysts project company earnings. These estimates act as investment clues.
A positive earnings surprise or earnings improvement is often the case when actual or reported earnings exceed the consensus estimate. Historically, if a company’s earnings manage to exceed market expectations, its shares rise after publication.
Why is Earnings Beat higher than earnings growth?
A 20% increase in profit (although apparently looks good) doesn’t tell you everything about the company. This could represent a slowdown in earnings growth momentum over the years or quarters, raising questions about the company’s fundamentals.
Also, seasonal fluctuations sometimes come into play. If a company’s first quarter is seasonally weak and the fourth quarter is strong, a sequential decline in earnings is likely to be reported. In such cases, growth rates are misleading when judging the true health of a company.
On the other hand, analysts gather their knowledge and guidance from a company when they give an estimate of earnings. Therefore, exceeding that estimate is almost equivalent to exceeding the expectations of the company itself, as well as the perception of the market. Of course, this gives you a clear idea of the results of the company. And if the surprise profit margin is large, it usually causes the stock to rise right after launch.
How to find stocks that outperform?
Now, since it is difficult to predict whether a company will win or fail in the next earnings season, investors can check out the history of earnings surprises. An impressive track in this regard generally acts as a catalyst in sending stocks higher. Indicates the company’s ability to exceed estimates. And investors generally believe that the company will have the same trick up its sleeve – or in other words, it’s smart enough to outperform earnings on its next launch.
The winning strategy
In order to shortlist the stocks that are likely to have a surprise earnings, we chose the following as our primary selection parameters.
Last BPA Surprise greater than or equal to 10%:The stocks that gave a positive surprise in the last quarter tend to surprise again.
Average EPS surprise in the last four quarters greater than 20%:We raised the bar on outperformance slightly by setting the average EPS surprise for the past four quarters at 20%.
Average EPS surprise in the last two quarters greater than 20%:This points to a more consistent surprise story and makes the case for another surprise even stronger.
Also, we put in some other criteria that increase the chance of a surprise.
Zacks Rank less than or equal to 2: Only companies with a Zacks rank of n. 1 (Strong Buy) or 2 (Buy) can pass.
ESP earnings greater than zero: A stock must have a positive earnings ESP and a Zacks Rank of # 1, 2, or 3 (Hold) for an earnings hit to occur, based on our proven model.
To focus on those with long-term growth potential and high trade liquidity, we have also added the following parameters:
Next 3-5 years Estimated EPS growth (per year) greater than 10%: Strong expected earnings growth shows the stock’s long-term growth prospects.
20-day average volume greater than 100,000: A high trading volume implies that the shares have adequate liquidity.
A handful of criteria has narrowed the universe from more than 7,700 stocks to around 12.
Here are five of the 12 actions that passed the screen:
lululemon athletica (LULU): This is a yoga-inspired sportswear company that creates lifestyle components. LULU has a Zacks # 2 rank. You can see today’s complete list of Zacks # 1 rank stocks here.
lululemon athletica designs, manufactures and distributes sports clothing and accessories for young women, men and women. LULU’s four-quarter average earnings surprise is 25.19%.
AutoZone (AZO): Zacks Rank # 2 AutoZone is one of the leading specialty retailers and distributors of automotive parts and accessories in the United States.
AutoZone operates in the DIY and DIY auto parts and product markets. AZO’s four-quarter average earnings surprise is 23.17%.
Chemours (CC): Zacks Rank # 2 Chemours Company is a leading supplier of high performance chemicals that are the key ingredients in end products and processes in a host of industries.
Chemours offers its customers solutions in a broad spectrum of industries, including plastics and coatings, refrigeration and air conditioning, mining and general industrial manufacturing, and electronics. The surprise average earnings for the last four quarters of CC is 34.24%.
The Goldman Sachs Group (GS): Zacks Rank # 1 Goldman Sachs is a leading global finance company, providing investment banking, securities, investment management and consumer banking services to a diversified customer base.
Goldman Sachs offers its services through four broad segments: the IB segment (contributed 27% to third quarter 2021 revenue), the Global Markets segment (41%), the Consumer & Wealth Management segment (15 %) and the Asset Management division (17%). The surprise average earnings for the last four quarters of GS is 66.80%.
Cross Country Medical Care (CCRN): Zacks Rank # 1 Cross Country Healthcare is a national leader in providing innovative solutions for the healthcare workforce and staffing services.
Cross Country Healthcare’s diverse customer base includes clinical and non-clinical settings, intensive care hospitals, medical practice groups, outpatient and ambulatory care centers, nursing facilities, public schools and charter schools, sports medicine and rehabilitation clinics, Government facilities and home care. CCRN’s last four quarter average earnings surprise is 74.97%.
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Disclosure: Zacks Investment Research officers, directors, and / or employees may own or have sold short securities and / or hold long and / or short positions in the options discussed in this material. An affiliated investment advisory firm may own or have sold short securities and / or hold long and / or short positions in the options mentioned in this material.
Disclosure: Information on the performance of Zacks’ portfolios and strategies is available at: https://www.zacks.com/performance.
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