There are few things that can light a fire under a stock like a positive earnings surprise. When a company beats expectations it sends a powerful message to the Street that business is good.
For example, Apple Inc. (NASDAQ:AAPL) jumped almost 10% in one day on January 31 after reporting record first-quarter results and a 5% positive earnings surprise.
However, it is difficult to predict which stocks will beat and which will disappoint. It’s kind of like throwing darts in the dark.
Today, I am going to reveal a better way to profit from an earnings surprise with one of Wall Street’s best kept secrets. Even better, this is the perfect time to capitalize. Let me explain…
First Quarter Earnings Season Is About To Kick Off
This is a pivotal quarter for S&P 500 earnings. After being trapped in an earnings recession for a year and a half, S&P 500 earnings are finally returning to sustained growth.
First-quarter earnings are expected to grow 6.5% and then steadily accelerate from there.
Take a look below.
I am expecting the S&P 500’s return to earnings growth to fuel some very nice positive earnings surprises this season.
But don’t worry — as I said before, you don’t have to predict which stocks will beat the Street to profit.
Let me show you a better way.
Earnings Surprises Are Self-Fulfilling Prophecies
The Post Earnings Announcement Drift (PEAD) is one of Wall Street’s best-kept secrets.
It is the tendency for a stock’s cumulative abnormal returns to drift in the direction of an earnings surprise for several weeks (or several months) following an earnings announcement.
Take a look at the chart of return distributions below.
This study demonstrates that companies beating earnings tend to outperform the S&P 500 in the weeks and months following a positive earnings surprise.
Now, I want to help you profit from this data. I have compiled a list of seven S&P 500 stocks with the most stellar and reliable histories of delivering positive earnings surprises.
| Company | Ticker | Q4 Positive Surprise (%) |
|---|---|---|
| Exxon Mobil Corporation | XOM | 25.00 |
| JPMorgan Chase & Co. | JPM | 20.42 |
| Netflix, Inc. | NFLX | 15.38 |
| Facebook Inc | FB | 11.71 |
| Amazon.com, Inc. | AMZN | 10.00 |
| Priceline Group Inc | PCLN | 8.94 |
| Boeing Co | BA | 5.56 |
Keep your eye on these stocks. If they report positive surprises I am expecting shares to be magnets for new capital and to outperform the S&P 500 in the next few months.
From the group I have chosen to profile Netflix and Amazon because of their upward momentum.
Netflix, Inc. (NASDAQ:NFLX) has been one of the best performing stocks in the S&P 500 over the past year. Shares are up 40% over this time. Those market-beating gains have been fueled by a string of positive earnings surprises, including a 15% positive earnings surprise last quarter. While that’s great, it actually pales in comparison to some of its other recent surprises. In the last four quarters, Netflix has an average earnings surprise of 141%. Looking forward, I am expecting Netflix to deliver great news when it reports first-quarter results.
Amazon.com, Inc. (NASAQ:AMZN) is another top performer. Shares are up 51% in the last 12 months. Once again, those gains have been driven by some big-time earnings surprises. Amazon has had an average positive earnings surprise of 25% in the last four quarters, including a 76% surprise and 56% surprise. Amazon recently broke the $900 level and a positive earnings surprise could be the perfect catalyst to push shares above $1,000.
Risks To Consider: Companies with a history of delivering positive earnings surprises will gradually see expectations rise. These companies need to keep delivering strong earnings growth to keep new capital flowing into shares.
Action To Take: The best way to profit from a positive earnings surprise is the PEAD. Look for companies beating expectations, buy, and look for shares to outperform the S&P 500 in the next few months. I’ll be keeping Netflix and Amazon at the top of my list.
Editor’s Note: Here’s your stock market “cheat sheet” for 2017. StreetAuthority reveals our Top 10 Stocks for making outrageous double- and possibly triple-digit gains in 2017. See the names, stories and ticker symbols for yourself here…
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