unofficially kicked off earnings season yesterday with a decent
report. The Aluminum giant actually came in line with the
Zacks Consensus of 7 cents and came up slightly short on the
revenue side. The report was initially viewed with a
positive light due to the increase in aluminum demand Alcoa was
That said, shares of Alcoa moved lower today after investors
had time to examine the details.
It's important to note that the earnings bar remains extremely
low and has come down substantially over the last quarter from
close to 4% year over year growth to now just 0.3%.
Even with the low expectations, it will be challenging to find
companies that beat earnings estimates especially being that
revenues are down year over year and the global consumer is
barely hanging on.
One bright spot for growth may be the financial space; our
Director of Research, Sheraz Mian noted this in a note to
investors HERE. The three financial stocks below all have
increased probability of a beat with their positive ESPs, but are
certainly not the strongest ESP stocks that I have
As we continue our search for stocks that have a high
likelihood of beating estimates, the Zacks Earnings ESP can be an
invaluable tool in your search. Here are a few companies
that look promising next week:
About Zacks Earnings ESP
Earnings ESP is Zacks' proprietary methodology for determining
which stocks have the best chance to surprise with their next
earnings announcement. The Earnings ESP shows the percentage
difference between the Most Accurate Estimate and the Consensus.
The Zacks ESP helps predict earnings surprises to the upside and
downside; the greater the ESP (positive or negative) the greater
the likelihood for a surprise. I use ESP to help quantify the
conviction of the analysts for a surprise and stack the odds in
my favor when I combine it with other measurements and
The Accuracy of ESP
Of course, some ESP numbers are better than others. In our
testing, over the last 10 years, we have found that stocks with a
positive ESP and with a Zacks Rank of 1, 2 or 3 (Strong Buy, Buy
or Hold), produced a positive surprise 70% of the time.
(The other 9% of the time, they reported in line with
expectations, with a negative surprise occurring only 21% of the
Bullish ESP Stocks
J.P. Morgan (
) is a Zacks Rank #2 (buy) stock with a positive earnings
ESP of 2.82% for the current quarter. The company is
expected to make $1.42 cents a share, but our ESP readings are
looking for a profit of $1.46 cents.
JPM has been looking strong over the last week or so and
shares are approaching the 52 week high of $55.90 going into the
With a valuation of just 9 times forward earnings and a man
like Jamie Dimon at the helm, analysts seem to be looking for a
beat from this financial giant on Friday.
- JP Morgan reports earnings on July 12th
Wells Fargo & Co. (
) is a Zacks Rank #3 stock with a positive earnings ESP of
1.10% for the current quarter; the Zacks Consensus is for a per
share profit of $0.92, with the most accurate at $0.93.
Wells Fargo is the largest loan originator in the U.S. and
their earnings calls are always good information for the
direction of the housing market.
Given the rise in home values and relative strength in new and
existing home sales, it should be a good quarter for
Wells. Of course, a rising interest rate has pros and
cons for banks of their size, but the overall analyst consensus
seems to be quite positive.
The majority of analyst action has been bullish and we have
seen estimates on the rise for the current quarter, next quarter
as well as FY 2013 and FY 2014 since WFC's last report.
It's important to note that despite the positive analyst actions,
ESPs are mixed looking forward in time as the future of housing
is still a little murky.
- Wells Fargo reports earnings on July 12th
TD Ameritrade (
) is a Zacks Rank #2 stock with a positive earnings ESP of
3.23% for the current quarter. The Zacks consensus estimate
is for Q1 EPS of $0.31 with the most accurate estimate coming in
Reuters recently published a story about the rising popularity
" by baby boomers, mainly in options and stocks which would
certainly benefit companies like AMTD.
TD Ameritrade has also been seeing positive analyst flow over
the last 2 months leading into their report next week, which is
usually a good sign for stocks looking to beat.
Shares are trading at 23 times forward earnings.
- AMTD reports earnings on July 23rd
ESP Earnings Results
Now that you know which groups of stocks to focus on to increase
your chances of a positive surprise, let's look at the size of
the ESP that has historically generated the best results.
First, just having a positive ESP produces market beating
results. Over the last 10 years, using a 1 week holding period
(stocks were held for no more than one week after they reported),
the average annual return was 23.5%. This is in stark contrast to
stocks with a negative ESP which produced a -9.20% return.
Now apply the Zacks Rank of 1, 2 or 3 to that list and the
returns jump to 28.3%.
If you require your stocks to have an ESP of greater than 1%,
we found it increased performance to 29.6%. An ESP of greater
than 2% bumps performance up to 31.6%. While an ESP of greater
than 3%, produces an average annual return of 37.2%.
Note: there's no need to hold out for stocks with
significantly higher ESP's than 3%. While some stocks with higher
ESP's will do fantastic, there's no aggregate increase in
performance by ratcheting it up beyond d the 3% threshold. And as
the above stats illustrate, simply having a positive ESP (i.e.,
the Most Accurate Estimate is above the Consensus) still produces
stellar results with a high probability of success.
Start Using Zacks ESP in Your Own Trading Today
The next time your stock is about to report or a stock on your
watch list is getting closer to their earnings date, be sure to
look at its Zacks ESP and see what your stock's probabilities are
of producing a positive surprise.
If you prefer to let someone else do all the work and have the
best candidates sent to your inbox, learn more about
Jared A Levy is one of the most highly sought after traders in
the world and a former member of three major stock exchanges.
That is why you will frequently see him appear on Fox Business,
CNBC and Bloomberg providing his timely insights to other
investors. He has written and published two tomes,
"Your Options Handbook"
"The Bloomberg Visual Guide to Options"
. You can discover more of his insights and recommendations
through his two portfolio recommendation services:
Follow Jared A Levy on twitter @jaredalevy
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ALCOA INC (AA): Free Stock Analysis Report
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WELLS FARGO-NEW (WFC): Free Stock Analysis
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