For Immediate Release
Chicago, IL – May 18, 2017 - Stocks in this week’s article include Papa Murphy's Holdings Inc. (NASDAQ: FRSH – Free Report ), Platform Specialty Products Corporation (NYSE: PAH – Free Report ), Five9 Inc. (NASDAQ: FIVN – Free Report ), Best Buy Co (NYSE:BBY). Inc. (NYSE: BBY – Free Report ) and Sonus Networks Inc. (NASDAQ: SONS – Free Report ).
Screen of the Week of Zacks Investment Research:
On the Lookout for Earnings Beats? 5 Top Picks
We are at the tail end of the Q1 earnings season, with over 89% of the S&P 500 constituents having reported already. The season has so far been fairly solid. Investors should note that along with the brightening earnings growth picture, beat ratios are also slowly scaling higher.
So far, about 72.4% of the companies beat EPS estimates, as per the Earnings Trends issued on May 10. We have seen a 68.9% earnings beat ratio (delivered by over 82% companies in the S&P 500 cohort) in the preceding earnings season. This strong earnings beat trend should cheer investors up.
Inside Earnings Surprise
Historically, stocks of companies with solid quarterly earnings (on a nominal basis) tank if they miss or merely meet market expectations. After all, a 20% earnings rise (though apparently looks good) doesn’t tell you if it has been decelerating.
Also, seasonal fluctuations can come into play. If a company’s Q1 is seasonally weak and Q4 is strong, it is likely to report a sequential earnings decline. In such cases, growth rates are misleading while judging the true health of a company.
On the other hand, after a whole lot of research and analysis on a company’s financials and initiatives, Wall Street analysts project its earnings. They also take a company’s guidance into consideration when deriving an earnings estimate.
Thus, outperforming that estimate is almost equivalent to beating the company’s own expectation as well as the market perception. And if the margin of earnings surprise is big, it typically drives the stock higher right after the release. Thus, more than anything else, an earnings surprise can push a stock higher.
How to Find Likely Outperformers?
Now, finding stocks that have the potential to beat on the bottom line is a dream that investors chase but might not always come true. One way of fulfilling it is by looking at the earnings surprise history of a company.
An impressive track in this regard generally acts as a driver in sending a stock higher. It indicates the company’s ability to exceed estimates. And investors generally believe that the company will have the same trick up its sleeve to deliver yet another earning beat in its upcoming release.
The Winning Strategy
In order to shortlist stocks that are likely to come up with an earnings surprise, we chose the following as our primary screening parameters.
Last EPS Surprise greater than or equal to 10%: Stocks delivering positive surprise in the last quarter tend to surprise again.
Average EPS Surprise in the last four quarters greater than 20%: We lifted the bar for outperformance slightly higher by setting the average EPS surprise for the last four quarters at 20%.
Average EPS Surprise in the last two quarters greater than 20%: This points to a more consistent surprise history and makes the case for another surprise even stronger.
In addition, we place a few other criteria that push up the chance of a surprise.
Zacks Rank less than or equal to 2: Only companies with a Zacks Rank #1 (Strong Buy) or 2 (Buy) can get through.
Earnings ESP greater than zero: A stock needs to have both a positive Earnings ESP and a Zacks Rank of #1, 2 or 3 (Hold) for an earnings beat to happen, as per our proven model.
In order to zero in on those that have long-term growth potential and high trading liquidity we have added the following parameters too:
Next 3–5 Years Estimated EPS Growth (Per Year) greater than 10%: Solid expected earnings growth exhibits the stock’s long-term growth prospects.
Average 20-day Volume greater than 100,000: High trading volume implies that the stocks have adequate liquidity.
A handful of criteria have narrowed down the universe from over 7,700 stocks to around eight.
Here are five out of the eight stocks that passed the screen:
Papa Murphy's Holdings Inc. (NASDAQ:FRSH – Free Report ): This Zacks Rank #2 company operates as a franchisor and operator of the Take 'N' Bake pizza chain in the U.S. The Zacks Industry Rank of the stock is in the top 35%.
Platform Specialty Products Corporation (NYSE:PAH – Free Report ): This company produces high technology specialty chemical products. The Zacks Industry Rank of the stock is in the top 34%. The stock has a Zacks Rank #2. You can see the complete list of today’s Zacks #1 Rank stocks here .
Five9 Inc. (NASDAQ:FIVN – Free Report ): This company provides cloud software to contact centers. It sports a Zacks Rank #2. The Zacks Industry Rank of the stock is in the top 42%.
Best Buy Co. Inc. (NYSE:BBY – Free Report ): This leading retailer carries a Zacks Rank #2. The Zacks Industry Rank of the stock is in the top 11%.
Sonus Networks Inc. (NASDAQ:SONS – Free Report ): This company is a provider of voice infrastructure products for the new public network. Sonus has a Zacks Rank #2. Though the Zacks Industry Rank of the stock is in the bottom 35%, the Zacks Sector Rank is in the top 44%.
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Disclosure: Officers, directors and/or employees of Zacks Investment Research may own or have sold short securities and/or hold long and/or short positions in options that are mentioned in this material. An affiliated investment advisory firm may own or have sold short securities and/or hold long and/or short positions in options that are mentioned in this material.
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Papa Murphy's Holdings, Inc. (FRSH): Free Stock Analysis Report
Platform Specialty Products Corporation (PAH): Free Stock Analysis Report
Five9, Inc. (FIVN): Free Stock Analysis Report
Best Buy Co., Inc. (BBY): Free Stock Analysis Report
Sonus Networks, Inc. (SONS): Free Stock Analysis Report
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