The first-quarterearnings season is almost over, with more
than 90% of the S&P 500 reporting. Although the results have
been far from terrible, there hasn't been alot to get excited
Earnings are up 3.3% from lastyear , whilerevenue is down 1%.
Those numbers have 65% of the S&P 500 beating expectations,
below the average beat rate of 70% in the past fourquarters . In
spite of those lackluster results, some companies still managed
to deliver positive earnings surprises.
For example, take
Netflix (Nasdaq: NFLX)
. With the successfully execution of a broad-basedturnaround
strategy, Netflix sneaked up on the Street and delivered a
hugeearnings surprise that sentshares soaring for the second
quarter in a row.
But if you missed out on those biggains , don't worry -- there
is a little-knownmarket phenomenon that should continue tosupport
Netflix'sstock . In the pattern known as post-earnings drift, a
stock is likely to continue rising for weeks and sometimes even
months after reporting an earnings surprise.
When a company reports an earnings surprise, that new information
is quickly absorbed by the market and usually gives shares a big
boost. But according to research on post-earnings drift, firms
with good quarterly earnings reports tend to see returns drift
upward for at least 60 days after their announcements. Similarly,
firms that report disappointing earnings tend to drift lower for
a similar period.
This phenomenon is on display in Netflix's chart. After the
company's huge earnings surprise from late January lifted the
company from below $100 to $169, shares continued to drift higher
to $196 in the next month, an additional 18%gain .
The post-earnings drift means investors don't have to search for
a needle in a haystack and identify companies on the cusp of a
big earnings surprise. They can instead focus on companies that
have already reported great quarters and jump on the momentum
With the post-earnings drift in clear focus, here is a list of
the seven S&P 500 companies that most exceededanalysts '
From the group, I have chosen to highlight Netflix for its
upward momentum and homebuilder
because of its exposure to the ongoing housing market recovery.
Netflix has been one of the best turnaround stories of 2013,
logging an eye-popping gain of 154% as the top performing stock
in the S&P 500.
That upward momentum has been driven by two things. The first is
two huge earnings surprises, beating expectations by 208% in the
fourth quarter of 2012 and then following that up with a 72%
surprise in the first quarter. The second is massive upward
revisions in earnings estimates, with the current-year estimate
jumping from $1 per share 90 days ago to $1.60, a 451% growth
projection from last year.
Looking forward, analysts expect Netflix's earnings to grow
another 93% in 2014, withearnings per share (
) of $3.09. But though Netflix has already seen huge gains, the
upward momentum of the post-earnings drift should keep shares on
Lennar has also been burning up the charts, gaining 50% in the
past year and 150% in the past two. Much like Netflix, those
gains have been fueled by big earnings surprises: an average beat
of 46% in the past four quarters, with the most recent results
beating expectations by 100%.
Analysts have been quick to revise earnings estimates higher,
calling forEPS this year of $1.76, which would amount to a 105%
increase from 2012. Analysts are calling for earnings growth of
40% in 2014.
With clearearnings momentum in hand, this homebuilder continues
to benefit from the housing recovery and the post-earnings drift.
Risks to Consider:
Stocks with large gains from an earnings surprise are
susceptible to abnormal volatility as "fastmoney " flows in and
out of shares looking for a quick gain.
Action to Take -->
In spite of a lackluster earnings season, these sevenstocks
reported huge earnings surprises and are in position to benefit
from the post-earnings drift.
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