The earnings pace as quickened this week and the results have not be stellar. By Monday afternoon, only 34 of the 498 stocks in the S&P 500 had reported. Of those 34 companies we saw total earnings up +16% from the same period last year, with 64.7% of them beating earnings expectations. Total revenues for these companies are up +5.5% and 41.2% of them reported positive top-line surprises.
As the week progressed, we saw revenue and earnings weakness start to materialize a bit more with Nokia ( NOK – Analyst Report ), Intel ( INTC – Analyst Report ), Bank of New York (BK), eBay ( EBAY – Analyst Report ) and others missing the mark. UnitedHealth saw their first-quarter earnings fall 14% as higher medical bills continued to outpace increased revenue, they were trading down today as well.
Order weakness was also seen in tech giant Apple ( AAPL – Analyst Report ) , who saw its shares cut by 9% this week alone.
My three stock picks from last week, Goldman, Yahoo and Blackstone, all beat Zacks EPS estimates, but are struggling on market weakness and less than perfect earnings reports. The reality is that markets are now extremely finicky when it comes to dissecting results; companies must be firing on all cylinders.
As we continue our search for stocks that have a high likelihood of beating estimates, the Zacks Earnings ESP can be an invaluable tool in your search.
Here are a few companies that look promising next week:
About Zacks Earnings ESP
Earnings ESP is Zacks’ proprietary methodology for determining which stocks have the best chance to surprise with their next earnings announcement. The Earnings ESP shows the percentage difference between the Most Accurate Estimate and the Consensus. The Zacks ESP helps predict earnings surprises to the upside and downside; the greater the ESP (positive or negative) the greater the likelihood for a surprise. I use ESP to help quantify the conviction of the analysts for a surprise and stack the odds in my favor when I combine it with other measurements and statistics.
The Accuracy of ESP
Of course, some ESP numbers are better than others. In our testing, over the last 10 years, we have found that stocks with a positive ESP and with a Zacks Rank of 1, 2 or 3 (Strong Buy, Buy or Hold), produced a positive surprise 70% of the time. (The other 9% of the time, they reported in line with expectations, with a negative surprise occurring only 21% of the time.)
Bullish ESP Stocks
Hasbro ( HAS – Analyst Report )is a Zacks Rank #3 stock with a positive earnings ESP of 33% for the current quarter. The company is expected to make 3 cents a share, but our ESP readings are looking for a profit of 4 cents.
This stock may be worth a look after Mattel announced first-quarter net income more than quadrupled helped by strong sales of dolls like Monster High, Disney Princess and American Girl. The toy market must not be doing that poorly..
Hasbro recently announced collaboration with World Trade Jewelers to create and distribute jewelry using Hasbro related themes. This could help with their guidance which I believe would be the Achilles heel of their upcoming report.
– Hasbro reports earnings on April 22nd
Devry ( DV – Analyst Report ) is a Zacks Rank #3 stock with a positive earnings ESP of 6.02% for the current quarter; the Zacks Consensus is for a per share profit of $0.83, with the most accurate at $0.88.
This education company is getting a fair amount of love from analysts ahead of its report next week and the company has been buying back a relatively large amount of shares. There is no doubt that the space has struggled, but as some of its peers are showing, a recovery might not be too far away.
The majority of analyst action has been bullish and we have seen estimates on the rise for the current quarter, next quarter as well as FY 2013 and FY 2014 since Devry’s last report. ESPs are also positive for those time frames.
– Devry reports earnings on April 23rd
USG Corp ( USG – Snapshot Report ) is a Zacks Rank #2 stock with a positive earnings ESP of 54.55% for the current quarter. The Zacks consensus estimate is for Q1 EPS of $0.11 with the most accurate estimate coming in at $0.17.
The improvement in the housing market has helped push USG, a large building materials supplier, higher over the last 12 months. The stock has defied gravity somewhat as it has missed Zacks Consensus estimates 4 of the last 4 reports.
The company has been losing money, but is expected to get back to profitability this quarter and make 65 cents a share this year. Hopefully the robust housing data has helped propel them closer to that goal.
Lower input costs should also help out their cause as commodity prices have come down.
– USG reports earnings on April 24th
ESP Earnings Results
Now that you know which groups of stocks to focus on to increase your chances of a positive surprise, let’s look at the size of the ESP that has historically generated the best results.
First, just having a positive ESP produces market beating results. Over the last 10 years, using a 1 week holding period (stocks were held for no more than one week after they reported), the average annual return was 23.5%. This is in stark contrast to stocks with a negative ESP which produced a -9.20% return.
Now apply the Zacks Rank of 1, 2 or 3 to that list and the returns jump to 28.3%.
If you require your stocks to have an ESP of greater than 1%, we found it increased performance to 29.6%. An ESP of greater than 2% bumps performance up to 31.6%. While an ESP of greater than 3%, produces an average annual return of 37.2%.
Note: there’s no need to hold out for stocks with significantly higher ESP’s than 3%. While some stocks with higher ESP’s will do fantastic, there’s no aggregate increase in performance by ratcheting it up beyond d the 3% threshold. And as the above stats illustrate, simply having a positive ESP (i.e., the Most Accurate Estimate is above the Consensus) still produces stellar results with a high probability of success.
Start Using Zacks ESP in Your Own Trading Today
The next time your stock is about to report or a stock on your watch list is getting closer to their earnings date, be sure to look at its Zacks ESP and see what your stock’s probabilities are of producing a positive surprise.
If you prefer to let someone else do all the work and have the best candidates sent to your inbox, learn more about Whisper Trader now.
Jared A Levy is one of the most highly sought after traders in the world and a former member of three major stock exchanges. That is why you will frequently see him appear on Fox Business, CNBC and Bloomberg providing his timely insights to other investors. He has written and published two tomes, “Your Options Handbook” and “The Bloomberg Visual Guide to Options”. You can discover more of his insights and recommendations through his two portfolio recommendation services:
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