Markets

5 Top Stocks to Bet on Likely Earnings Beat this Season

Have you thought about what investors look for the most in the peak of the earnings season? Many believe it is earnings growth. But earnings improvement (no matter how big it is) no longer seems sufficient for solid market movement. It is the "BEAT" that matters the most.

Why Is Earnings Surprise So Important?

An earnings surprise is typically the case when actual or reported earnings come in higher than the consensus estimate. Historically, stocks of companies with solid quarterly earnings (on a nominal basis) tank if they miss or merely meet market expectations.

After all, a 10% earnings rise (though apparently looks good) doesn't tell you everything about the company. This growth may be decelerating over the years or quarters, raising questions over the company's fundamentals.

Also, seasonal fluctuations come into the play sometimes. If any company's Q1 is seasonally weak and Q4 is strong, then it is likely to report a sequential earnings decline. In such cases, growth rates are misleading while judging the true health of a company.

On the other hand, analysts apply their insights and consider a company's guidance when forecasting its earnings estimate. As a result, beating that key number is almost equivalent to beating one's own expectation as well as the market estimate. Needless to say, this gives you a better picture of the company's bottom line. And if the margin of earnings surprise is big, it typically sends the stock skyrocketing immediately after the release.

Also, a history of positive earnings surprise generally works as a catalyst in sending a stock higher. It indicates the company's ability to surpass the estimates. And investors generally believe that the company will apply the same trick or in other words is smart enough to beat on earnings in its next release. Hence, earnings surprise can be viewed as a key metric for share price outperformance.

The Winning Strategy

In order to shortlist stocks that are likely to come up with an earnings surprise, we chose the following as 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 less than or equal to 2: Only companies with a Strong Buy or Buy rating can get through.

Earnings ESPgreater than zero: A stock needs to have both a positive Earnings ESP and a Zacks Rank of #1 (Strong Buy), 2 (Buy) or 3 (Hold) 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 just nine.

Here are five out of nine stocks:

Matador Resources CompanyMTDR : This Zacks Rank #2 energy company is engaged in the exploration and development of oil and natural gas resources. The Zacks Industry Rank is in the top 11%.

EQT CorporationEQT : This is an integrated energy company with a Zacks Rank #2. The Zacks Industry Rank is in the top 11%.

Applied Optoelectronics Inc. AAOI : This designer and manufacturer of advanced optical devices is poised in the top 25% of the Zacks Industry Rank. The company sports a Zacks Rank #1. You can see the complete list of today's Zacks #1 Rank stocks here .

Halliburton CompanyHAL : The Zacks Rank #2 stock is one of the world's largest providers of products and services to the energy industry. The Zacks Industry Rank is in the top 31%.

Oclaro Inc. OCLR : This is a provider of high performance optical components with a Zacks Rank #2. The Zacks Industry Rank is in the top 1%.

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:https://www.zacks.com/performance.

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EQT Corporation (EQT): Free Stock Analysis Report

Applied Optoelectronics, Inc. (AAOI): Free Stock Analysis Report

Oclaro, Inc. (OCLR): Free Stock Analysis Report

Halliburton Company (HAL): Free Stock Analysis Report

Matador Resources Company (MTDR): 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.


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

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