Trading Secrets, Weekly Market Outlook

5 Top-Ranked Stocks Likely To Beat On Earnings

Gone are the days when investors were content with just earnings growth. Now, earnings improvement (no matter how big) seems inadequate for solid moves in the market. It is the “BEAT” that matters the most.

What is Earnings Beat?

Inna Rosputnia - female traderA positive earnings surprise or earnings beat is typically the case when actual or reported earnings come in above the consensus estimate. Historically, if a company’s earnings manage to beat market expectations, its stock surges post release.

This is becauseinvestors always try to take position ahead of time and look for stocks that are likely to come up with a stellar performance. Now since Wall Street analysts project earnings of companies after much brainstorming, their estimates act as investment leads.

Why Earnings Beat is Superior to Earnings Growth?

After all, only earnings beat can give investors a clear picture of a company’s strength when an industry-wide earnings recession is felt.Also, a 20% earnings rise (though apparently looks good) doesn’t say everything about the company’s performance. This might represent a decelerating earnings growth momentum over the years or quarters, raising questions over the company’s fundamentals.

Also, seasonal fluctuations come into the play at times. If a 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 put together their insights and a company’s guidance when coming up with an earnings estimate. Thus, outperforming that estimate is almost equivalent to beating the company’s own expectation as well as market perception.

Last but not the least, sometimes companies manipulate earnings by resorting to accounting tricks, thereby leading to inaccuracy. So, it becomes necessary to match the performance with what analysts are expecting.

How to Find Stocks that Can Beat?

Now, since it is difficult to foretell if a company will beat or miss in the upcoming earnings season, investors can check the earnings surprise history. An impressive track in this regard generally acts as a catalyst in sending a stock higher. 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.

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 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 slightly 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. Lady F Rank less than or equal to 2: Only companies with a Lady F Rank #1 (Strong Buy) or 2 (Buy) can get through.

Earnings ESP greater than zero: A stock needs to have both a positive Earnings ESP and a Lady F Rank of #1, 2 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 around 11.

Here are five out of the 11 stocks:

Mitek Systems Inc. (NASDAQ:MITK) : This company develops, markets and sells mobile capture and identity verification software solutions for enterprise customers worldwide. Mitek has a Lady F Rank #2.

U.S. Silica Holdings Inc. (NYSE:SLCA) : This Lady F Rank #1 company is a producer of industrial minerals.

Suncor Energy Inc. (NYSE:SU) : This is a world leader in mining and extracting crude oil from the vast oil sands deposits of northern Alberta. The stock has a Lady F Rank #1.

Antero Resources Corporation (NYSE:AR) : This is an independent oil and natural gas company. It has a LAdy F Rank #1.

Teradyne Inc. ( (NYSE:TER) ): This company is a manufacturer of automatic test equipment and related software for the electronics and communications industries. It has a Lady F Rank #2.