Increase Odds of a Positive Surprise - Analyst Blog
Surprises are, by definition, unexpected. However, since we know
that companies that report better-than-expected earnings tend to
see their share prices rise after the announcement, and those that
disappoint sink, it would be nice to be able to get in front of
those that are likely to do better than expected and get out of the
way of those which are going to disappoint.
Not easy to do, but there is a way to improve your odds. I like to
look for the combination of three inter-related factors in trying
to figure out who will post positive surprises, and who will
disappoint.
Check the Recent History
I start with the fact that historically, companies that reported a
positive surprise last time around are much more likely to do so in
the next quarter than those that reported in line or disappointed.
I thus required every firm in the screen below to have had a
positive earnings surprise in its previous quarter.
However, positive earnings surprises are much more common than
negative surprises. In the S&P 500, a “normal quarter” will
have about three times as many firms reporting better-than-expected
EPS than below-expected earnings.
Upward Revisions Are Key
The next thing I looked for was rising estimates for the quarter
that is about to be reported. Often analysts will get a whiff that
something good is going to happen, and will raise their estimates.
However, they tend to be reluctant to go too far out on a limb, so
if the consensus is looking for XYZ Corp. to earn $1.00 for the
quarter, and the analyst gets information suggesting that the firm
might be able to report $1.50, they do not raise their estimate all
the way to $1.50. Instead they might raise it to say $1.25. That
would make them the high estimate.
If the company does indeed report $1.50, they still look like a
hero; if they report $1.00 they were not that far away from the
herd, and thus retain some job security. Also, not all the analysts
will get (or properly interpret) the information. If there are 10
analysts providing estimates for the quarter, one analyst raising
his estimate from $1.00 to $1.25 would only raise the consensus
(average) estimate by 2.5%. If another analyst follow suit the next
month, that will raise the consensus by about another 2.5%.
This is one of the key reasons that an estimate in motion tends to
stay in motion, and why it is so vital to pay attention to estimate
revisions. I required that the consensus estimate for the
completed, about to be released quarter have increased by at least
3% over the last four weeks. I did not insist on any particular
level of expected earnings for the quarter, but the information, as
well as what the company earned last year, is provided in the table
below.
Keep in mind that low absolute levels tend to go hand in hand with
big percentage changes. A move of a penny is a much bigger change
if the base is $0.02 than if it is $1.00. The table below is sorted
by the increase in the quarterly estimate.
Check the FY Estimate Momentum
I also wanted a sense that the estimate momentum for other periods
was positive. The second quarter is, after all, part of the full
fiscal year. Usually, increases for the quarter should be matched
(at least in dollar, if not percentage, terms) by increases for the
full fiscal year. There are exceptions to this -- for example, a
big contract being booked in the second quarter rather than the
third. But that sort of surprise is less likely to lead to big
upward price moves.
My proxy for estimate momentum other than in the just-finished
quarter is the Zacks Rank. I only considered those firms rated
either #2 (Buy) or #1 (Strong Buy). Those are the strongest 20% of
the firms out there on estimate momentum.
Creating a Workable List
By limiting the list to firms with Market Capitalizations of over
$500 million, the list was whittled down to 31 firms. It is a
remarkably diverse group. About half of the names are based outside
the U.S. Nine of the 16 Zacks economic sectors are represented, but
the biggest concentration is in Energy (8 firms) and Technology (7
firms).
Valuations also vary widely, with 7 firms having single-digit P/E
ratios and seven having P/E ratios over 20, based on the consensus
estimates for this year.
While there is no guarantee that these firms will all post
better-than-expected earnings this quarter, history suggests that
there odds of doing so are much better than average.
Company |
Ticker |
Completed Q Cons Est |
Q EPS Before NRI |
Last EPS Surprise % |
% Chng Curr Q Est - 4 wk |
% Chg Curr FY Est -1 wk |
% Chg Next FY Est - 4 wks |
Zacks Rank |
Market Cap ($ mil) |
Gt Solar Intl |
SOLR |
$0.31 |
$0.11 |
20.59% |
128.70% |
0.00% |
11.32% |
1 |
$2,037 |
Merck Kgaa |
MKGAF |
$2.62 |
$1.56 |
0.94% |
60.74% |
0.00% |
24.40% |
1 |
$6,801 |
Amer Intl Grp |
AIG |
$1.18 |
$1.99 |
966.67% |
49.91% |
-1.75% |
1.34% |
1 |
$56,865 |
Silicon Graphic |
SGI |
($0.05) |
($0.55) |
142.86% |
43.75% |
-4.15% |
10.64% |
2 |
$541 |
Imperial Oil Lt |
IMO |
$1.21 |
$0.54 |
18.52% |
22.22% |
0.00% |
12.46% |
1 |
$40,108 |
Hollyfrontier |
HFC |
$2.56 |
$1.24 |
18.12% |
20.41% |
3.05% |
29.30% |
1 |
$3,829 |
Constant Contac |
CTCT |
$0.01 |
($0.03) |
14.29% |
20.00% |
0.00% |
-2.00% |
2 |
$743 |
Copa Hldgs Sa-A |
CPA |
$0.71 |
$0.60 |
35.77% |
15.78% |
1.50% |
3.76% |
1 |
$2,983 |
Alon Usa Energy |
ALJ |
$0.46 |
($0.55) |
47.62% |
15.35% |
51.80% |
270.00% |
2 |
$610 |
Suncor Energy |
SU |
$0.74 |
$0.48 |
73.02% |
13.59% |
0.00% |
0.56% |
1 |
$62,376 |
Pepco Hldgs |
POM |
$0.29 |
$0.34 |
35.00% |
12.82% |
0.00% |
0.42% |
2 |
$4,488 |
Orbotech Ltd |
ORBK |
$0.52 |
$0.45 |
62.50% |
9.09% |
0.00% |
6.86% |
1 |
$543 |
Basic Egy Svcs |
BAS |
$0.37 |
($0.31) |
900.00% |
8.93% |
4.16% |
12.81% |
1 |
$1,372 |
Om Group Inc |
OMG |
$0.77 |
$0.67 |
59.38% |
8.54% |
0.00% |
16.37% |
1 |
$1,266 |
Delek Us Hldgs |
DK |
$0.58 |
$0.23 |
40.91% |
8.14% |
0.00% |
11.88% |
1 |
$911 |
Youku.Com- Adr |
YOKU |
($0.06) |
N/A |
22.22% |
8.00% |
0.00% |
23.53% |
2 |
$2,812 |
Grupo Galic Adr |
GGAL |
$0.41 |
$0.10 |
21.05% |
7.89% |
0.00% |
1.46% |
1 |
$1,732 |
Siemens Ag-Adr |
SI |
$2.61 |
$2.05 |
98.37% |
6.67% |
-0.29% |
0.41% |
2 |
$120,787 |
Pan Amer Silver |
PAAS |
$0.76 |
$0.17 |
9.09% |
4.80% |
0.00% |
13.05% |
1 |
$3,270 |
Huntsman Corp |
HUN |
$0.49 |
$0.29 |
95.83% |
4.59% |
3.16% |
8.36% |
1 |
$4,650 |
Aveo Pharmaceut |
AVEO |
($0.78) |
($0.50) |
500.00% |
4.49% |
-2175.00% |
-10.34% |
1 |
$839 |
Embraer Air-Adr |
ERJ |
$0.47 |
$0.39 |
70.59% |
4.13% |
0.00% |
0.65% |
1 |
$5,773 |
Usana Hlth Sci |
USNA |
$0.75 |
$0.69 |
4.48% |
4.05% |
-0.26% |
0.51% |
2 |
$528 |
Triple-S Mgmt-B |
GTS |
$0.57 |
$0.67 |
18.92% |
3.66% |
0.00% |
0.79% |
2 |
$641 |
Transdigm Group |
TDG |
$0.99 |
$0.86 |
13.25% |
3.54% |
1.51% |
2.56% |
2 |
$4,663 |
Targa Resources |
NGLS |
$0.37 |
$0.23 |
54.17% |
3.50% |
0.16% |
-0.51% |
1 |
$3,100 |
Liquidity Svcs |
LQDT |
$0.15 |
$0.12 |
80.00% |
3.45% |
0.00% |
4.91% |
1 |
$647 |
Helix Egy Solut |
HLX |
$0.19 |
$0.18 |
166.67% |
3.38% |
0.00% |
0.00% |
2 |
$1,769 |
Caci Intl A |
CACI |
$1.16 |
$0.96 |
12.62% |
3.23% |
2.73% |
3.59% |
2 |
$1,956 |
Capital One Fin |
COF |
$1.66 |
$1.78 |
46.41% |
3.08% |
0.00% |
0.86% |
2 |
$24,184 |
Park National |
PRK |
$1.11 |
$1.30 |
31.63% |
3.03% |
0.53% |
-0.43% |
2 |
$1,020 |
AMER INTL GRP (AIG): Free Stock Analysis Report
IMPERIAL OIL LT (IMO): Free Stock Analysis Report
SILICON GRAPHIC (SGI): Free Stock Analysis Report
GT SOLAR INTL (SOLR): Free Stock Analysis Report
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