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
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
Last EPS Surprise greater than or equal to 10%
: Stocks delivering positive surprise in the last quarter tend to
Average EPS Surprise in the last four quarters greater than
: 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
: 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.
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
In order to zero in on those that have long-term growth
potential and high trading liquidity we have added the following
Next 3-5 Years Estimated EPS Growth (Per Year) greater than
Solid expected earnings growth exhibits the stock's long-term
Average 20-day Volume greater than 100,000:
High trading volume implies that the stocks have adequate
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.
: 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%.
: 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
: 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.
: 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%.
: 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
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
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:
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WELLCARE HEALTH (WCG): Free Stock Analysis
MCDERMOTT INTL (MDR): Free Stock Analysis
HARSCO CORP (HSC): Free Stock Analysis Report
MATADOR RESOURC (MTDR): Free Stock Analysis
IMPRIVATA INC (IMPR): Free Stock Analysis
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