It is not surprising that before an earnings season, every investor looks for stocks that can beat market expectations. This is because investors always try to position themselves ahead of time and look to tap stocks that are high-quality in nature.<\/p>\n
In this regard, we ran a screener that yielded Coty COTY, BJ’s Restaurants BJRI, Palo Alto Networks PANW, Livent LTHM and Bath & Body Works Inc. BBWI as the likely winners on the earnings beat potential.<\/p>\n
Historically, stocks of companies with solid quarterly earnings (on a nominal basis) tank if they miss or merely meet market expectations. After all, a 20% earnings rise (though apparently looks good) doesn\u2019t tell you if earnings growth has been exhibiting a decelerating trend.<\/p>\n
Also, seasonal fluctuations come into play sometimes. If a company\u2019s Q1 is seasonally weak and Q4 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.<\/p>\n
On the other hand, after much brainstorming and analysis of companies\u2019 financials and initiatives, Wall Street analysts project earnings of companies. They in fact club their insights and a company\u2019s guidance when deriving an earnings estimate.<\/p>\n
Thus, outperforming that estimate is almost equivalent to beating the company\u2019s own expectation as well as the market perception. And if the margin of earnings surprise is big, it typically drives the stock higher right after the release. Thus, more than anything else, an earnings surprise can push a stock higher.<\/p>\n
Now, finding stocks that have the potential to beat on the bottom line may be investors\u2019 dream but not an easy job. One way to do this is to look at the earnings surprise history of the company.<\/p>\n
An impressive track in this regard generally acts as a catalyst in sending a stock higher. It indicates the company\u2019s ability to surpass estimates. And investors generally believe that the company will apply the same secret sauce to execute yet another earning beat in its next release.<\/p>\n
In order to shortlist stocks that are likely to come up with an earnings surprise, we chose the following as our primary screening parameters.<\/p>\n
Last EPS Surprise greater than or equal to 10%:<\/strong>\u00a0Stocks delivering positive surprise in the last quarter tend to surprise again.<\/p>\n Average EPS Surprise in the last four quarters greater than 20%:\u00a0<\/strong>We lifted the bar for outperformance slight higher by setting the average earnings surprise for the last four quarters at 20%.<\/p>\n Average EPS Surprise in the last two quarters greater than 20%:<\/strong>\u00a0This points to a more consistent surprise history and makes the case for another surprise even stronger.<\/p>\n In addition, we place a few other criteria that push up the chance of a positive surprise.<\/p>\n Zacks Rank less than or equal to 2:<\/strong>\u00a0Only companies with a Zacks Rank #1 (Strong Buy) or 2 (Buy) rating can get through.<\/p>\n Earnings ESP<\/strong>\u00a0greater than zero:\u00a0<\/strong>A stock needs to have both a positive Earnings ESP and a Zacks Rank of #1, 2 or 3 for an earnings beat to happen, as per our proven model.<\/p>\n In order to zero in on those that have long-term growth potential and high trading liquidity we have added the following parameters too:<\/p>\n Next 3\u20135 Years Estimated EPS Growth (Per Year) greater than 10%:<\/strong>\u00a0Solid expected earnings growth exhibits the stock\u2019s long-term growth prospects.<\/p>\n Average 20-day Volume greater than 100,000:\u00a0<\/strong>High trading volume implies that the stocks have adequate liquidity.<\/p>\n A handful of criteria has narrowed down the universe from over 7,700 stocks to only nine.<\/p>\n Here are five out of nine stocks:<\/p>\n Coty (COTY):<\/strong> The Zacks Rank #2 company is engaged in the manufacturing, marketing and distribution of beauty products. You can see\u00a0the complete list of today\u2019s Zacks #1 Rank stocks here<\/strong>.<\/p>\n The average earnings surprise of COTY for the past four quarters is 145.0%.<\/p>\n BJ’s Restaurants (BJRI)<\/strong>: The Zacks Rank #1 company owns and operates a chain of high-end casual dining restaurants in the United States.<\/p>\n The average earnings surprise of BJRI for the past four quarters is 93.01%.<\/p>\n Palo Alto Networks (PANW)<\/strong>: The Zacks Rank #1 company offers network security solutions to enterprises, service providers and government entities worldwide.<\/p>\n The average earnings surprise of PANW for the past four quarters is 20.27%.<\/p>\n Livent (LTHM)<\/strong>: The Zacks Rank #1 company produces and distributes lithium chemicals.<\/p>\n The average earnings surprise of LTHM for the past four quarters is 22.07%.<\/p>\n Bath & Body Works Inc. (BBWI)<\/strong>: The Zacks Rank #2 company is a specialty retailer and is home to America’s Favorite Fragrances offering exclusive fragrances for the body and home.<\/p>\n The average earnings surprise of BBWI for the past four quarters is 44.60%.<\/p>\n 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.<\/em><\/p>\n Disclosure: Performance information for Zacks\u2019 portfolios and strategies are available at:\u00a0<\/em>http:\/\/www.zacks.com\/performance<\/strong><\/em>.<\/p>\n BJ’s Restaurants, Inc. (BJRI): Free Stock Analysis Report<\/p>\n Palo Alto Networks, Inc. (PANW): Free Stock Analysis Report<\/p>\n Coty (COTY): Free Stock Analysis Report<\/p>\n Livent Corporation (LTHM): Free Stock Analysis Report<\/p>\n Bath & Body Works, Inc. (BBWI): Free Stock Analysis Report<\/p>\n To read this article on Zacks.com click here.<\/p>\n This article originally appeared on Zacks<\/i><\/p>\n Sponsored: Tips for Investing<\/b><\/p>\n A financial advisor can help you understand the advantages and disadvantages of investment properties. Finding a qualified financial advisor doesn’t have to be hard. SmartAsset’s free tool matches you with up to three financial advisors who serve your area, and you can interview your advisor matches at no cost to decide which one is right for you. If you’re ready to find an advisor who can help you achieve your financial goals, get started now.<\/p>\n Investing in real estate can diversify your portfolio. But expanding your horizons may add additional costs. If you’re an investor looking to minimize expenses,\tconsider checking out online brokerages. They often offer low investment fees, helping you maximize your profit.<\/p>\n