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Ride on Positive Earnings Surprises with These 5 Stocks


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The last few hours prior to the release of a company's quarterly financial results always make investors jumpy. They are anxious if the companies they are tracking or holding in their portfolios will be able to pull off an earnings beat. This is because an earnings beat generally translates into price appreciation. In fact, it works better than earnings growth in this regard. We'll tell you why.

What Makes Earnings Beat So Intriguing?

Historically, stocks of companies with solid quarterly earnings (on a nominal basis) fall if they miss or just come in line with market expectations. After all, a 20% earnings rise (though it looks good apparently) doesn't tell you if earnings growth has been exhibiting a decelerating trend. If that is the case, the company's fundamentals are in serious question.

Also, seasonal fluctuations are a crucial factor in determining a company's earnings growth. If a company's Q1 is seasonally weak and its Q4 is strong, then it is likely to report a sequential earnings decline in Q1. In such cases, growth rates are fallacious when it comes to analyzing the true picture of a company.

On the other hand, Wall Street analysts rack their brains in order to study companies' financials and initiatives to forecast earnings. They in fact club their insights and the company's guidance to derive an earnings estimate.

Thus, beating this key number is almost equivalent to beating the company's own expectation as well as the market perception. And if the margin of surprise is big, it typically drives the stock higher right after the release.

Now, since it is difficult to foretell if a company will beat or miss in the upcoming earnings season, investors can check its earnings surprise history. An impressive track record generally acts as a catalyst, sending the stock higher. It proves the company's ability to surpass estimates. And investors generally believe that the company will have the same trick up its sleeve or, in other words, is smart enough to beat on earnings in its next release as well.

The Winning Strategy

In order to shortlist stocks that are likely to come up with an earnings surprise, we chose the followingas our primary screening parameters.

Last EPS Surprise greater than or equal to 10% : Stocks delivering positive surprise in the last quarter tend to surprise again.

Average EPS Surprise in the last four quarters greater than 20% : We lifted the bar for outperformance slight higher by setting the average EPS surprise for the last four quarters at 20%.

Average EPS Surprise in the last two quarters greater than 20% : This points to a more consistent surprise history and makes the case for another surprise even stronger.

In addition, we place a few other criteria that push up the chance of a surprise.

Zacks Rank equal to 1 : Only companies with a Strong Buy rating can get through.

Earnings ESP greater than zero: A stock needs to have both a positive Earnings ESP and a Zacks Rank of #1, 2 or 3 for an earnings beat to happen, as per our proven model.

In order to zero in on those that have long-term growth potential and high trading liquidity we have added the following parameters too:

Next 3-5 Years Estimated EPS Growth (Per Year) greater than 10%: Solid expected earnings growth exhibits the stock's long-term growth prospects.

Average 20-day Volume greater than 100,000: High trading volume implies that the stocks have adequate liquidity.

A handful of criteria has narrowed down the universe from over 7,700 stocks to around 5.

Here are all five stocks that passed the screen:

WellCare Health Plans Inc. WCG : The company is a provider of managed care services exclusively targeting government-sponsored healthcare programs. Its expected EPS growth rate for this year 35.47%.

Imprivata Inc IMPR : This provider of authentication and access management solutions for the healthcare industry is expected to log a 17.7% expansion in earnings per share this year.

Matador Resources Company MTDR : This energy company is engaged in the exploration, development and acquisition of oil and natural gas resources.Though its expected EPS growth rate for this year is negative 410%, the expected growth rate for the next year is positive 179.2%.

McDermott International Inc. MDR : This is a provider of engineering, construction and module fabrication services for upstream field developments. However, its expected year-over-year growth rate is negative 71.43%.

Harsco Corporation HSC : This is an industrial services and engineered products provider. Though its expected EPS growth rate for this year is negative 46.4%, the expected growth rate for the next year is positive 73.3%.

You can get the rest of the stocks on this list by signing up now for your 2-week free trial to the Research Wizard and start using this screen in your own trading. Further, you can also create your own strategies and test them first before taking the investment plunge.

The Research Wizard is a great place to begin. It's easy to use. Everything is in plain language. And it's very intuitive. Start your Research Wizard trial 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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WELLCARE HEALTH (WCG): Free Stock Analysis Report

MCDERMOTT INTL (MDR): Free Stock Analysis Report

HARSCO CORP (HSC): Free Stock Analysis Report

MATADOR RESOURC (MTDR): Free Stock Analysis Report

IMPRIVATA INC (IMPR): Free Stock Analysis Report

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The views and opinions expressed herein are the views and opinions of the author and do not necessarily reflect those of Nasdaq, Inc.



This article appears in: Business , Investing , Earnings , Stocks
Referenced Symbols: WCG , MDR , HSC , MTDR ,



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