With an earnings season just around the corner, investors will stop obsessing about the Fed’s actions and the next set of manufacturing data for some time, and confront the ground reality of the companies. By all accounts, Wall Street is anticipating yet another quarter of bleak earnings reports and less-than-stellar company outlooks.
Needless to say, the first-quarter earnings season is carting along with it the now familiar gloomy shroud of declining earnings estimates.
We have seen three quarters of back-to-back negative earnings growth through fourth-quarter 2015, and the picture is not expected to change anytime soon. While negative estimate revisions have been a recurring theme for several quarters now, the sheer magnitude of this quarter’s revisions is particularly alarming.
In fact, earnings are now expected to actually decline in the first half of 2016, with all of the growth this year now expected to come in the latter half.
This foretells a dark spell for stocks in the near future because earnings and expectations for earnings growth are the most important drivers of stock prices.
Never-Ending Negative Revisions
Total earnings for the S&P 500 index for the first quarter of 2016 are now expected to be down 10% year over year, which is a sharp markdown from what was expected at the beginning of the period.
Growth estimates for the full year have been knocked lately as well. Total earnings for the S&P 500 index are now expected to grow just 2.1% over 2015. To illustrate the markdown, growth expectations stood at about 8% at the start of the year.
What’s even more distressing is the fact that the downward revisions have been quite broad-based, i.e. they are not just a carryover of Energy sector issues.
Sifting out the Winners
In the face of negative revisions to estimates, the optimists hope that the reaction may have been somewhat exaggerated. But like always, there will be plenty of companies overcoming odds and emerging as winners this season.
Although not all companies that post positive earnings surprises see their stock price appreciate, studies indicate that on an average, earnings beats drive strong returns in share prices for several weeks following the report. This is what we call the “post-earnings-announcement drift.”
Picking out and investing in such stocks before they report earnings can substantially boost your portfolio returns.
The Zacks Advantage
While it is impossible to know with conviction which stocks have the potential to beat estimates this earnings season and which ones will disappoint, our proprietary Earnings ESP (Expected Surprise Prediction) system makes it relatively easy.
Earnings ESP – the percentage difference between the Most Accurate estimate and the Zacks Consensus Estimate – is our proprietary methodology for distinguishing stocks that have a high chance of beating estimates in their next earnings reports.
A straightforward way to narrow down such stocks is to screen them with a favorable Zacks Rank – Zacks Rank #1 (Strong Buy), #2 (Buy) or #3 (Hold) – and a positive Earnings ESP. The combination of a favorable Zacks Rank and a positive Earnings ESP usually heralds an earnings beat. Our research shows that the chance of a positive earnings surprise for such stocks is as high as 70%.
To refine our screen further, we are only considering stocks with an impressive history of beating estimates in the past four quarters. Also, these champions have been seeing positive estimate revisions of late, flying in the face of the general trend. These attributes add up to positive analyst interest and signal great prospects for the company.
Just five companies got through our screen, and here they are:
Our Potential Outperformers
American Public Education, Inc. APEI is a provider of online and campus based post-secondary education, and is focused primarily on serving the military and public service communities.
This Zacks Rank #1 company has an Earnings ESP of +11.11%. The Most Accurate estimate for the company is currently at 50 cents, ahead of the Zacks Consensus Estimate, which is pegged at 45 cents for the upcoming quarter.
The company has beaten estimates in three of the last four quarters, registering an average quarterly beat of over 11%. Also, its fiscal 2016 estimate has climbed from $1.63 to $1.70 over the past 30 days. With its impressive combination of the top Zacks Rank and a positive earnings ESP, this company looks set to continue its winning streak in the upcoming earnings report.
Daqo New Energy Corp. DQ is an established semiconductor equipment and materials company that manufactures and sells high-qualitypolysiliconto photovoltaic product manufacturers.
This Zacks Rank #1 company has an Earnings ESP of +31.88%. The Most Accurate estimate for the company is currently at 91 cents, ahead of the Zacks Consensus Estimate, which is pegged at 69 cents for the first quarter.
The company has registered a whopping average quarterly beat of over 213% by beating estimates in three of the last four quarters. Moreover, its estimate for 2016 earnings has trended sharply up over the past month, from $1.88 to $3.01 per share. With its impressive combination of the top Zacks Rank and a positive earnings ESP, the company looks set to continue its beat streak.
BlackRock Capital Investment Corporation BKCC provides creative and flexible capital solutions to middle-market companies.
This Zacks Rank #1 company has an Earnings ESP of +3.85%. The Most Accurate estimate for the company is currently at 27 cents, ahead of the Zacks Consensus Estimate, which is pegged at 26 cents for the soon-to-be-reported quarter.
The company has beaten estimates in three of the last four quarters, registering an average quarterly beat of over 11%. In addition, the company has seen a sharp spike in the Zacks Consensus Estimate for 2016, which now stands at $1.02, up from 97 cents a month back. With its impressive combination of the top Zacks Rank and a positive earnings ESP, this company looks confident of posting another earnings beat in the upcoming report.
MiMedx Group, Inc. MDXG is an integrated developer, processor and marketer of patent protected regenerative biomaterial products and bio-implants processed from human amniotic membrane.
This Zacks Rank #1 company has an Earnings ESP of +16.67%. The Most Accurate estimate for the company is currently at 7 cents, ahead of the Zacks Consensus Estimate, which is pegged at 6 cents for the upcoming quarter.
The company has beaten estimates in each of the last four quarters, registering an average quarterly beat of nearly 50%. Also, its fiscal 2016 estimate has climbed from 23 cents to 35 cents over the past 60 days. With its striking combination of a top Zacks Rank and a positive earnings ESP, this company looks set to continue its winning streak in the upcoming earnings report.
CalAmp Corp. CAMP provides wireless communications solutions for various applications worldwide. This Zacks Rank #1 company has an Earnings ESP of +3.70%. The Most Accurate estimate for the company is currently at 28 cents, ahead of the Zacks Consensus Estimate, which is pegged at 27 cents for the soon-to-be-reported quarter.
The company has beaten estimates in each of the last four quarters, registering an average quarterly beat of nearly 13%. In addition, the company has seen the Zacks Consensus Estimate for 2016 go up from 99 cents a month back to $1.00 today. With its impressive combination of the top Zacks Rank and a positive earnings ESP, this company looks set to post another earnings beat in the upcoming report.
A Winning Strategy
The first quarter earnings season is about to take off soon, 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' Earnings ESP system can significantly increase your odds of discovering these winners before they report and help you ride the potential stock appreciation that follows.
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