The onset of the third-quarter earnings season has opened a Pandora’s box with investors glued to quarterly releases, looking for stocks that are poised to beat earnings.
Market pundits are of the view that a company’s earnings performance is possibly the most important factor influencing its stock price.
No wonder then, in the world of finance, earnings is indeed both literally and figuratively ‘the bottom line.’
Headwinds Prevail
Weakness in the Energy sector, a strong U.S. dollar and lackluster global growth — particularly in China and other emerging markets — has been clouding the earnings picture in the last few trailing quarters and we expect these headwinds to impact third-quarter results as well.
Notably, the Q2 earnings picture has been quite dismal, with earnings for the S&P 500 index down -2.2% from the same period last year on -3.5% lower revenues.
What to Expect?
Overall earnings for the S&P 500 index are expected to be down -5.9% in the third-quarter from the same period last year on -5.8% lower revenues, with the figure barely moving into the positive territory even after the negative impact of the Energy sector is excluded. (Read more: Earnings Weakness Isn't Just Energy Driven)
As is always the case, guidance will be key, which will determine expectations for the current period. Earnings growth for the last quarter of the year are currently expected to be in the negative as well, with the expected decline rate likely to expand in the coming days as companies report results and guide lower.
What to Do?
Of late, the market has been preoccupied with global concerns and the Fed rate hike decision. However, as third-quarter earnings take the spotlight, it’s time for investors to put these macro issues behind and instead focus on readjusting their portfolios to capitalize on market predictions for this earnings season.
Despite the uncertainties, a number of companies will rise above all odds this season. Thus, investors can successfully beat the market by picking and investing in such stocks that are likely to trump earnings in the to-be-reported quarter.
How to Screen the Outperformers?
With a wide range of stocks thronging the investment space, it is by no means an easy task for investors to arrive at stocks that have the potential to deliver better-than-expected earnings.
While it is impossible to be sure about such outperformers, our proprietary methodology – Earnings ESP – makes it relatively simple.
It aids in identifying stocks that have high chances of posting positive surprises in the next earnings announcement. It also shows the percentage difference between the Most Accurate estimate and the Zacks Consensus Estimate.
5 Stocks to Invest In
With the help of the Zacks Stock Screener, we have zeroed-in on five stocks that sport a Zacks Rank #1 (Strong Buy) or 2 (Buy), flaunt an Earnings ESP of over 5% and have recorded EPS (earnings per share) surprise of over 10% in the last quarter.
These are the stocks which have a high chance of beating expectations with their quarterly releases:
Headquartered in San Diego, CA, NuVasive, Inc. NUVA is a medical device company focused on the design, development and marketing of products for the surgical treatment of spine disorders. Nuvasive is currently focusing on three growth areas viz. effective increase in market share, innovation in products and business and position enhancement as a market-leading distributor and innovator of spine devices. The company’s performance in the international space particularly raises optimism.
Nuvasive has a Zacks Rank #1 and its current Earnings ESP is 7.41%. Last quarter, the company posted a positive earnings surprise of 29.17%. Moreover, the company has outpaced the Zacks Consensus Estimate in three of the trailing four quarters, with an average beat of 14.29%.
Nuvasive is scheduled to report its third-quarter 2015 results on Oct 27, after market close.
The Chubb Corporation CB is a holding company with subsidiaries principally engaged in the property and casualty insurance business. Chubb has agreed to be acquired by ACE limited in a cash-stock consideration. The combination of the companies, with complementary products and services, will position the new entity as a leader in the P&C space.
Chubb sports a Zacks Rank #1 and Earnings ESP of 13.51%. In the last reported quarter, the company’s earnings surpassed the Zacks Consensus Estimate by 11.23%. Further, the company posted positive earnings surprises in all of the prior four quarters, with an average beat of 7.62%.
Chubb is slated to release its third-quarter 2015 financial numbers on Oct 20, after market close.
The Travelers Companies, Inc. TRV is a leading provider of commercial property-liability insurance and asset management services. Travelers’ inorganic growth story is impressive. Additionally, cost reduction plans are expected to enhance the company’s savings in 2015. Backed by a solid performance, the company has been generating sufficient capital, which it prudently deploys to enhance shareholders’ value.
Travelers has an impressive Zacks Rank #1 and its Earnings ESP is pegged at 13.88%. Last quarter, the company posted a positive earnings surprise of 18.87%. Moreover, the company outpaced the Zacks Consensus Estimate in three of the trailing four quarters, with an average beat of 14.42%.
Travelers is slated to release its third-quarter 2015 results before the opening bell on Oct 20.
Spectra Energy Partners, LP SEP is a Houston-based master limited partnership, formed by Spectra Energy Corp. The company is one of the largest pipeline MLPs in the U.S. and connects growing supply areas to high-demand markets for natural gas, natural gas liquids and crude oil. These assets include more than 17,000 miles of transmission and gathering pipelines, roughly 170 billion cubic feet of natural gas storage, and around 4.8 million barrels of crude oil storage.
The company boasts a solid Zacks Rank #2 and an Earnings ESP of 9.33%. Last quarter, Spectra Energy recorded a significant 52.94% positive earnings surprise. Moreover, the company’s earnings beat the Zacks Consensus Estimate in all of the last four quarters, with the average being 37.96%.
Spectra Energy is scheduled to announce third-quarter 2015 results before the opening bell on Nov 4.
Qualys, Inc. QLYS is a provider of cloud security and compliance solutions that enable organizations to identify security threats to their information technology infrastructure and also help them protect their IT systems and applications against cyber attacks.
The company has a Zacks Rank #2 and an Earnings ESP of 40.00%. Last quarter, Qualys recorded a robust 200.00% positive earnings surprise. Moreover, the company’s earnings have surpassed the Zacks Consensus Estimate in the last four quarters, with an average beat of an astounding 233.33%.
Qualys is slated to release its third-quarter 2015 financial numbers on Nov 2, after market close.
Maximize Returns This Earnings Season
These stocks, by virtue of their favorable Zacks Rank, positive earnings ESP, strong fundamentals and growth prospects are likely to come out with flying colors this earnings season. And sometimes it just takes a great earnings report to shift the mentality of traders.
An earnings beat more often than not boosts investor confidence in a stock translating into rapid stock price appreciation. Thus, these stocks could turn out to be great additions to your portfolio ahead of their earnings releases!
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