The second earnings season of 2016 is upon us. And this season, investors are presented with a very interesting situation thanks to recent market performance.
Many stocks have retraced their losses from earlier in the year and are sitting at fresh highs, but broad questions remain about the economy as well.
Several industrial production metrics remain weak, while foreign economies remain a big wildcard. And with a presidential election fast approaching, the volatility that can potentially come from a new president is starting to impact stocks as well.
But despite this uncertainty, there will still be plenty of big winners this earnings season. To find these primed-to-outperform stocks, we here at Zacks have developed a proprietary system called ‘Earnings ESP’ (Expected Surprise Prediction), which can greatly help to uncover these huge winners before they report earnings.
So if you want to increase your odds of success this earnings season — and who wouldn’t given the uncertain backdrop? — then this is one metric you need to know.
Taking the Surprise Out of Earnings Season
What if you were tipped off to stocks that will exceed earnings expectations BEFORE their reports are released? You’d be able to buy before other investors swarm in and the prices start rising.
Thanks to Zacks’ breakthrough research, it’s possible to predict positive “surprises” with a previously unthinkable 82.88% reliability. Now you can get in early on these high-potential stocks before Wall Street has a chance to react.
Alert: Access closes at midnight Sunday, April 24.
The Crystal Ball of Earnings Season
While it is impossible to know with complete certainty which stocks will deliver positive surprises this earnings season and which ones will disappoint, our proprietary Earnings ESP system determines which stocks have the best chance to surprise with their next earnings announcement. This method predicts earnings surprises with more than 83% accuracy.
The Earnings ESP is simply the percentage difference between the ‘Most Accurate Estimate’ and the ‘Zacks Consensus Estimate’ for a company’s upcoming earnings per share number:
Earnings ESP = (Most Accurate Estimate / Zacks Consensus Estimate) -1
The most accurate estimate is the consensus of earnings estimates from analysts over the last 30 days. The Zacks Consensus Estimate, on the other hand, takes the consensus of all analysts’ estimates for the quarter, even if that estimate hasn’t been revised in three months.
The underlying concept here is that the most recent analyst estimate revisions are usually the most accurate. Think about it – if an analyst revises his earnings estimate right before an earnings release, he is likely using fresh information that will lead to a more accurate estimate than what analysts predicted two or three months ago.
Just like with a weather forecast that is more accurate for tomorrow than when trying to predict the weather three months from now, the more accurate estimates will usually be the ones that have all the most recent information at their disposal.
For example, let’s say specialty retailer XYZ Corp reports earnings next week. The Zacks Consensus Estimate for the coming quarter is comprised of eight analysts’ estimates and is 75 cents per share. However, three analysts have increased their earnings estimates for XYZ Corp within the last 30 days.
Perhaps these analysts have recently visited stores and measured traffic, spoken with suppliers, surveyed customers or incorporated recent economic data into their earnings models. The consensus among these recent estimates is 78 cents per share. That would give XYZ Corp an Earnings ESP of 4% (78 cents/75 cents). This company is likely to deliver a positive earnings surprise.
While not all companies that deliver positive earnings surprises will see their stock price rise, studies show that, on average, companies that deliver solid beats see excess returns in their share price for several weeks following the report. This is known as the post-earnings-announcement drift. And finding these stocks before they beat, and then holding them in this ‘drift’ period, can really boost your returns.
Despite several headwinds facing the market, there are bound to be plenty of large positive surprises this quarter. Utilizing Zacks’ Earnings ESP system can greatly increase your odds of finding these big winners before they report.
How Can the Earnings ESP Work for You?
You could start your stock search with this metric. The problem is that in each earnings season, including now, there are hundreds of stocks with positive ESPs.
That is why our Zacks research team created a special strategy that uses additional filters to narrow down the lists and detect rare companies that are most likely to both beat earnings and soar in price. This drives the portfolio I am managing called the
I can’t share all the details of its formula with you, but it relies on two under-used criteria coming from the brokerage analyst community. These two factors are then layered on top of other time-tested elements such as the Zacks Rank and Zacks Industry Rank to find only the best stocks in the best industries.
This is a significant research breakthrough, and it predicts positive earnings surprises before they are reported, with once-impossible precision.
If you’d like to get in on strong potential profits this earnings season, and are ready to jump quickly on the flurry of positive surprises this strategy is turning up, then I invite you to join us.
But don’t delay. We can’t let too many share these recommendations, so it is generally closed to the public. Today it is briefly open again, but the doors close again at midnight Sunday, April 24.
Look into Zacks Surprise Trader now >>
Good investing,
Eric
Eric Dutram is Zacks’ Earnings Surprise Strategist and manages the Surprise Trader portfolio.
Want the latest recommendations from Zacks Investment Research? Today, you can download 7 Best Stocks for the Next 30 Days. Click to get this free report
To read this article on Zacks.com click here.
