Beat Market With 5 Stocks Having Earnings Surprise Potential

Earnings have been the most important drivers of stock performance. This is because earnings are the lifeblood of any business, determining its ability, soundness, and growth prospects. Companies with earnings growth potential generally catch investors’ eye due to their solid financial position and growth potential, thereby leading stock prices higher.  

However, many companies use accounting tricks to fatten earnings, thereby leading to inaccuracy. As a result, earnings growth does not reflect the true picture of the company and might hurt investors’ portfolio. Instead, investors’ should look at earnings beat or miss, which drives the real performance of the stock.  

Why Earnings Surprise?

An earnings surprise or an earnings beat occurs when actual or reported earnings come in above the consensus estimate. Wall Street analysts project earnings estimate based on various analysis and insights of companies’ financials and current market conditions. Exceeding this estimate is almost equivalent to beating the company’s own expectation as well as the market perception. In addition, if the margin of earnings surprise is big, it typically drives the stock higher immediately after the release.

Further, earnings surprise has proven its supremacy over the earnings growth metric. History reveals that stocks with solid quarterly earnings growth (say of 20%) tank if they miss or merely meet market expectations, thereby exhibiting a decelerating trend. Plus, growth rates are misleading when seasonal fluctuations come into play. If any company’s Q1 is seasonally weak and Q4 is strong, then it is likely to report a sequential earnings decline.

Thus, more than anything else, an earnings surprise shows the true health of a company. An impressive track in this regard generally acts as a catalyst in sending a stock higher. Earnings surprise history indicates a company’s consistency in beating market estimates. In addition, investors normally have confidence in such companies and expect them to apply the same secret sauce to execute yet another earnings beat in its next release.

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%.

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Disclosure: None.

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