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It is earnings season again! Every earnings season brings with it the potential for huge moves. However, this season investors have a lot to chew on. With inflation running rampant and a Federal Reserve reacting with aggressive rate hikes, investors are worried to say the least. It's not the same as the Fed taking away the punch bowl. The Fed is trying to snuff out a wave of inflation that has hit every part of the economy. It is a huge departure from what the market has seen over the last decade plus. This is going to be a serious rate-hike cycle, the likes of which we have not seen since the Volker era. Tech stocks continue to be absolutely rocked, with risk-off hitting the four-letter tickers harder than ever. There has been a rotation back into the "old economy" stalwarts out there. Energy stocks surged as oil prices gushed through the roof. That move could be over now though, and the next move is just developing. Consumer defensive stocks are coming en vogue with war waging in Eastern Europe. You better get busy getting smart this earnings season or you are going to get busy getting poor. The dart-board approach, buying whatever Cathie Wood is loading up on, or stocks you hear about on Reddit are not going to work for you this earnings season. You are going to have to choose your investments wisely. Papa Elon is not going to save you. Where to Look for Winners In the current stock market environment, investors need to focus on companies with the best fundamentals in order to find the big winners this earnings season. Investors need to stick to the basics and buy the stocks with the strongest earnings trends in the best industries. One way to uncover them ahead of time is with our proprietary system called 'Earnings ESP' (Expected Surprise Prediction) which can assist you in uncovering these huge winners before they report earnings. So if you want to increase your odds of success this earnings season—and who wouldn't, given the market backdrop?—then this is one metric you need to know. The Crystal Ball of Earnings Season While it is impossible to know with complete certainty which stocks will deliver positive surprises this earnings season and which ones will disappoint, our proprietary Earnings ESP system determines which stocks have the best chance to surprise with their next earnings announcement. This method predicts earnings surprises with more than 80% accuracy. The Earnings ESP is simply the percentage difference between the 'Most Accurate Estimate' and the 'Zacks Consensus Estimate' for a company's upcoming earnings per share number: Earnings ESP = (Most Accurate Estimate / Zacks Consensus Estimate) -1 The most accurate estimate is the consensus of earnings estimates from analysts over the last 30 days. The Zacks Consensus Estimate, on the other hand, takes the consensus of all analysts' estimates for the quarter, even if that estimate hasn't been revised in three months. More . . . | ||||
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| Timeliness Is Critical The underlying concept here is that the most recent analyst estimate revisions are usually the most accurate. Think about it - if an analyst revises his earnings estimate right before an earnings release, he is likely using fresh information that will lead to a more accurate estimate than what analysts predicted two or three months ago. Just like with a weather forecast that is more accurate for tomorrow than when trying to predict the weather three months from now, the more accurate estimates will usually be the ones that have all the most recent information at their disposal. For example, let's say specialty retailer XYZ Corp reports earnings next week. The Zacks Consensus Estimate for the coming quarter is comprised of eight analysts' estimates and is $0.75. However, three analysts have increased their earnings estimates for XYZ Corp within the last 30 days. Perhaps these analysts have recently visited stores and measured traffic, spoken with suppliers, surveyed customers or incorporated recent economic data into their earnings models. The consensus among these recent estimates is $0.78. That would give XYZ Corp an Earnings ESP of 4% ($0.78/$0.75). This company is likely to deliver a positive earnings surprise. While not all companies that deliver positive earnings surprises will see their stock price rise, studies show that, on average, companies that deliver solid beats see excess returns in their share price for several weeks following the report. This is known as the post-earnings-announcement drift. And finding these stocks before they beat, and then holding them in this 'drift' period, can really boost your returns. Despite several headwinds facing the market, there are bound to be plenty of large positive surprises this quarter. Utilizing Zacks' Earnings ESP system can greatly increase your odds of finding these big winners before they report. Can the Earnings ESP Work for You - Easily? You could start your stock search with this metric. The problem is that in each earnings season, including now, there are hundreds of stocks with positive ESPs. That is why some years ago our Zacks research team created a special strategy with additional filters to narrow down the lists. It detects rare companies that are most likely to both beat earnings and jump in price. This drives the portfolio I am managing called the Surprise Trader. I can't share all the details of its formula with you, but it relies on two under-used criteria coming from the brokerage analyst community. These two factors are then layered on top of other time-tested elements such as the Zacks Rank and Zacks Industry Rank to find only the best stocks in the best industries. This is a significant research breakthrough, and it predicts positive earnings surprises before they are reported, with documented 80.77% accuracy. It offers you the chance to beat Wall Street to the punch by getting in early on price pops that can follow positive surprises. In fact, our Surprise Trader portfolio recently closed gains of +114.4%, +77.9%, +55.9%, +36.6%, and +22.5% in as little as 6 days.¹ This earnings season presents unusual opportunities because stocks are oversold. So if you would like to pursue quick, substantial gains and are ready to move on the flurry of positive surprises we're turning up, then I invite you to join us. As a bonus, you are invited to download our "Early Warning Alert" report free. It reveals Stocks to Sell Before They Report Earnings in the Coming Weeks. Our strategy works both ways, and you can use this report to avoid companies that are likely to report the worst negative surprises from April 18-29. But don't delay. We can't let too many share our "surprise" recommendations so they are generally closed to the public. Today the portfolio is open again, but your chance to gain access ends on midnight Sunday, April 17. Look into the Zacks Surprise Trader now » Good Investing,
Dave Bartosiak is Zacks' resident earnings surprise expert. He selects stocks and delivers commentary for our Surprise Trader portfolio. | ||||
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| ¹ The results listed above are not (or may not be) representative of the performance of all selections made by Zacks Investment Research's newsletter editors and may represent the partial close of a position. This free resource is being sent by Zacks.com. We look for investment resources and inform you of these resources, which you may choose to use in making your own investment decisions. Zacks is providing information on this resource to you subject to the Zacks "Terms of Service". https://www.zacks.com/terms_of_service Past performance is no guarantee of future results. Inherent in any investment is the potential for loss. This material is being provided for informational purposes only and nothing herein constitutes investment, legal, accounting or tax advice, or a recommendation to buy, sell or hold a security. No recommendation or advice is being given as to whether any investment is suitable for a particular investor. It should not be assumed that any investments in securities, companies, sectors or markets identified and described were or will be profitable. All information is current as of the date of herein and is subject to change without notice. Any views or opinions expressed may not reflect those of the firm as a whole. Zacks Investment Research is not a licensed securities dealer, broker or US investment adviser or investment bank. The Zacks #1 Rank Performance covers the period beginning on January 1, 1988 through February 28, 2022. These returns are from hypothetical portfolios consisting of stocks with Zacks Rank #1 that were rebalanced monthly with zero transaction costs. These are not the returns of actual portfolios of stocks. The S&P 500 is an unmanaged index. Visit https://www.zacks.com/performance_disclosure for information about the performance numbers displayed above. Zacks Emails Zacks Investment Research |
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