Q4 season officially begins this week with the release of
Alcoa's numbers tomorrow morning. Even with Sandy, the
election, the fiscal cliff and the lingering deficit issues, the
market has been extremely resilient. So much so that the
S&P 500 has risen over 8% since the November lows, which were
hit just as Q3 earnings season was winding down.
What's interesting is that in that time, the total
fourth-quarter operating earnings estimate for the S&P 500 has
fallen to $25.29 a share from $26.87; the S&P earned $23.73 in
Q4-2012. These new expectations represent an almost 50% decrease in
year over year Q4 earnings growth from 13.2% to an expected 6.6% in
One would think that with those revisions we would move markets
lower, but obviously there is still hope that the U.S. will
continue its slow grind higher; economic data somewhat supports
this thesis. It's also important to note that the fourth
quarter does looks to be a better earnings season than the third
quarter, where earnings for the S&P 500 were down slightly
year-over-year, breaking an 11-quarter streak of EPS gains.
Finding stocks with the best chances of winning could be the
best path to finding rising stock prices after earnings especially
in uncertain times and the Zacks Earnings Surprise Prediction or
ESP helps target those stocks.
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 statistics.
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
Texas Industries (
) is a Zacks Rank 3 stock with a positive earnings ESP of
26.47% for the current quarter. The company is expected to
lose 34 cents a share, but our ESP readings are looking for a loss
of only 25 cents.
As the U.S. continues to slowly recover, we need to turn our
attention to our deteriorating infrastructure that is in dire need
of repair. TXI focuses most of its energy on Texas and
California which both lead the nation in federal highway
With an ever growing populous and recovery underway in both
states, TXI should stand to benefit. TXI has been struggling
with sales, but are expected to begin growing earnings in the
- Texas Industries reports earnings on January 9th.
) is a Zacks Rank 2 stock with a positive earnings ESP of
6.52% for the current quarter; the Zacks Consensus is for a per
share profit of $0.46.
Retail is getting mixed reviews for Q4, but eBay is in its own
subsector as mainly an auction site, but with regular sale type
items as well. Amazon was recently given an upgrade by Morgan
Stanley, which may mean that confidence hasn't been all lost on the
Shares are relativity rich at almost 22 times forward earnings,
but if eBay can deliver 13%+ growth, that multiple may be
justified. There was a recent flurry of bullish analyst
movements ahead of their report in a week. No analysts have lowered
their estimates in the last 30 days.
- eBay reports earnings on January 16th.
Fifth Third Bancorp (
) is a Zacks Rank 3 stock with a positive earnings ESP of 3%
for the current quarter. The Zacks consensus estimate is for
Q3 EPS of $0.42, with the most accurate estimate at
Banks and financials are expected to be the shining light in a
market with a mostly cloudy forecast.
Several analysts have noted positive developments in the sector;
and while Raymond James downgraded FITB from a strong buy to an
outperform, their price target on the stock still remains 13%
higher than the current price.
The majority of analysts are at least moderately bullish on the
name going into their next report.
- Fifth Third reports earnings on January 17th.
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%.
But requiring your stocks to have an ESP of greater than 1%,
increases its 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
watchlist 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.
But if you want guidance on what stocks are looking the
bestahead of thier reports, learn more about
EBAY INC (EBAY): Free Stock Analysis Report
FIFTH THIRD BK (FITB): Free Stock Analysis
TEXAS INDS (TXI): Free Stock Analysis Report
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