In the world of finance, earnings are ‘the bottom line,’ both literally and figuratively. And for good reason: a company’s earnings performance is probably the foremost factor influencing its stock price in today’s fast-paced world.
Of late, investors have been preoccupied with China, global growth worries and the Fed’s interest rate timeline. These macro concerns will take a back seat in the coming days as the third-quarter earnings season takes the spotlight.
Wall Street seems on edge — bracing itself for what could prove to be a gloomy earnings season, after the August sell-off wiped off roughly $11 trillion of value from global equities. The usual suspects which are ushering in weakness remain a strong dollar and sustained weak energy prices.
Yes, we are still following the negative estimate revision trend that has now been well entrenched for quite some time. Analysts have considerably lowered their expectations, dragged by economic slowdown in China, volatility in global markets, low energy prices and the unrelenting strength of the greenback.
However, if we dig a little deeper, the overall trend is somewhat negatively skewed by a huge drop in energy sector results. Also, the magnitude of revisions this quarter has been notably less than what we saw in the comparable periods in other recent quarters. That is reason enough to celebrate.
The Crystal Ball of Earnings Season
You must have noticed how some stocks skyrocket after the earnings results while others fall off a cliff. Ever wondered if there is a way to identify potential outperformers before they report?
Studies indicate that on an average, positive earnings surprises drive strong returns in share prices for several weeks following the report. This is what we call the post-earnings-announcement drift.
At Zacks, we have developed a system that beats the earnings estimate consensus more than 70% of the time. This system leverages the Zacks Rank, along with what we call Expected Surprise Prediction, or ESP. When a stock has a good Zacks Rank, as well as a positive Earnings ESP, there is a very high chance of the company beating estimates in its next earnings report.
Earnings Whispers or Roar for Profits?
Another tool in our arsenal is estimate revisions.
Earnings estimates come from brokerage firm stock analysts. As we get closer to earnings season, analysts have increasingly accurate information at their disposal to incorporate into their estimates.
When we fixated on those positive estimate revisions closest to the earnings announcement, that's where the earnings “whispers” become a roar.
These whispers tip us off that a big surprise is in the cards for the company and investors can get in and ride the ensuing stock appreciation.
Root for These 3 Champions
Thus, we capitalized on these signals coming from the brokerage analyst community that investors are oblivious to. We then integrated our time-tested Zacks Rank and Earnings ESP methodology, all the time ensuring that only those stocks that have consistently beat earnings by a huge margin got through.
Moreover, these champions have delivered staggering earnings beats of over 100% in their last reported quarter.
Qualys, Inc. QLYS
Qualys provides cloud security and compliance solutions in the U.S. The company has recently formed technology alliances with data analytics firm Splunk, Inc. SPLK and ServiceNow, Inc. NOW, a maker of software to help manage IT services.
The cybersecurity software company has consistently beaten estimates in each of the four trailing quarters, registering an astounding average beat of 233.3%. This Zacks Rank #2 (Buy) company has an Earnings ESP of +40.00%.
With its impressive combination of a great Zacks Rank and a positive earnings ESP, this company looks set to continue its winning streak in its upcoming earnings report on Nov 2. Also, analysts clearly see good things in the company’s future, as the Zacks Consensus Estimate for 2015 earnings has risen over 4% over the past month.
SkyWest Inc. SKYW
SkyWest, through its subsidiaries, operates a regional airline in the United States. It provides scheduled passenger and air freight services with approximately 3,500 total daily departures to various destinations in the United States, Canada, Mexico, and the Caribbean.
SkyWest has delivered huge earnings surprises in each of the four trailing quarters, posting an astonishing average surprise of 338%. This Zacks Rank #1 (Strong Buy) company has an Earnings ESP of +4.55%.
Moreover, analysts have become increasingly bullish on the company over the past month, with 2 upward estimate revisions that led to a sharp spike in the Zacks Consensus Estimate for 2015, which now stands at $1.80, up from $1.75 a month ago.
With a top Zacks Rank and positive analyst sentiment, the company looks well poised to beat estimates in its upcoming earnings report on Oct 29.
USA Compression Partners, LP USAC
USA Compression Partners is a Master Limited Partnership that provides natural gas compression services to domestic customers. These services include engineering, design, operation, service and repair of compressor units. USAC operates in a number of shale plays including the Fayetteville, Marcellus, Woodford, Barnett, Eagle Ford and Haynesville.
The company’s earnings have surpassed the Zacks Consensus Estimate in each of the prior four quarters, with an impressive average beat of 91.4%. The Zacks Rank #2 stock presently has an Earnings ESP of +20.00%.
Moreover, analysts have great expectations from the company this year, as estimate revisions have resulted in the company’s Zacks Consensus Estimate for 2015 increasing from 75 cents 30 days ago to 78 cents today.
With these time-tested elements in its favor, the company is likely to beat our current EPS consensus of 15 cents and post another huge surprise in its soon-to-be-reported earnings.
A Winning Strategy
The earnings season is just taking off, and it looks to be capricious at best. Companies are facing crucial headwinds, including some which affect their bottom line directly, like crude oil prices and the U.S. dollar.
However, like always, there will be some companies that will trump these challenges and stand out with great earnings surprises. Employing Zacks' ESP system can significantly increase your odds of discovering these winners before they report and boost your portfolio returns with the stock price appreciation.
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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
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