Earnings season is upon us and one very interesting point to consider is the recent history of earnings surprises for the reporting companies.
The concept of an earnings surprise is pretty simple -- the quarterly earnings come out, and earnings analysts are "surprised" by how they don't match up to their predictions. A surprise can indicate either positive or negative earnings, meaning the annual reports are above or below analysts' earnings estimates.
"Surprise" doesn't necessarily have to mean shocking either, it can be the difference of a few cents between what earning analysts predicted and what the company actually reports.
To be clear, earnings typically refer to after-tax net income.
Analysts pay close attentions to earnings. Whenever a company releases earnings data that beats analyst expectations, the stock will often rise in value to price in the good news. Negative earning surprises usually leads to a drop in share price.
To get the original earnings estimates, earning analysts conduct lengthy research into a company's financials and business. Beyond merely looking at accounting numbers, analysts use forecasting models, research new products, market and industrial trends, larger economic trends, etc. As a result, their opinions are usually considered by investors for guidance or as a benchmark of what "experts" expect.
Of course, analysts cannot perfectly predict the future, so individual earning expectations could be far off the mark. Also, analysts differ in opinion and skill, so estimates can vary greatly.
A few investing ideas
Interested in exploring companies that have a track record of beating analyst estimates?
For ideas, we started with a universe of about 170 stocks that have a history of beating analyst earnings estimates.
From this universe, we collected data on short-seller trends and identified the names that have seen a significant decrease in shares shorted over the last month (i.e., short-sellers have reduced bearish bets).
Short-sellers appear to think the upside potential of these names outweigh the downside. Considering the track record of these stocks relative to analyst earnings estimates, do you agree?
List sorted by average earnings surprise. (Click here to access free, interactive tools to analyze these ideas.)
List compiled by Eben Esterhuizen, CFA:
1. Advanced Micro Devices (NYSE: AMD ) : Operates as a semiconductor company in the United States, Japan, China, and Europe. In Sept. 2010: Reported EPS at 0.15 vs. estimate at 0.06 (surprise of 150%). In Dec. 2010: Reported EPS at 0.14 vs. estimate at 0.11 (surprise of 27.3%). In March 2011: Reported EPS at 0.08 vs. estimate at 0.05 (surprise of 60%). In June 2011: Reported 0.09 vs. estimate at 0.08 (surprise of 12.5%. [Average earnings surprise at 62.45%]. Shares shorted have decreased from 94.26M to 80.49M over the last month, a decrease which represents about 2.36% of the company's float of 583.28M shares.
2. US Airways Group (NYSE: LCC ) : Provides air transportation for passengers and cargo. In Sept. 2010: Reported EPS at 1.23 vs. estimate at 1.17 (surprise of 5.1%). In Dec. 2010: Reported EPS at 0.17 vs. estimate at 0.06 (surprise of 183.3%). In March 2011: Reported EPS at -0.68 vs. estimate at -0.72 (surprise of 5.6%). In June 2011: Reported 0.56 vs. estimate at 0.53 (surprise of 5.7%. [Average earnings surprise at 49.92%]. Shares shorted have decreased from 24.34M to 20.62M over the last month, a decrease which represents about 2.51% of the company's float of 148.33M shares.
3. ReachLocal (Nasdaq: RLOC ) : Provides a suite of online marketing and reporting solutions for the small and medium-sized businesses (SMBs) in North America and internationally. In Sept. 2010: Reported EPS at -0.1 vs. estimate at -0.18 (surprise of 44.4%). In Dec. 2010: Reported EPS at -0.1 vs. estimate at -0.16 (surprise of 37.5%). In March 2011: Reported EPS at -0.12 vs. estimate at -0.18 (surprise of 33.3%). In June 2011: Reported -0.03 vs. estimate at -0.12 (surprise of 75%. [Average earnings surprise at 47.55%]. Shares shorted have decreased from 2.50M to 2.24M over the last month, a decrease which represents about 2.83% of the company's float of 9.20M shares.
4. American Axle & Manufacturing Holdings (NYSE: AXL ) : Engages in the manufacture, engineering, design, and validation of driveline and drivetrain systems, and related components and chassis modules for automotive industry in the United States. In Sept. 2010: Reported EPS at 0.52 vs. estimate at 0.39 (surprise of 33.3%). In Dec. 2010: Reported EPS at 0.47 vs. estimate at 0.39 (surprise of 20.5%). In March 2011: Reported EPS at 0.5 vs. estimate at 0.38 (surprise of 31.6%). In June 2011: Reported 0.69 vs. estimate at 0.44 (surprise of 56.8%. [Average earnings surprise at 35.55%]. Shares shorted have decreased from 11.72M to 10.29M over the last month, a decrease which represents about 2.21% of the company's float of 64.70M shares.
5. Lincoln Educational Services (Nasdaq: LINC ) : Provides career-oriented post-secondary education services in the United States. In Sept. 2010: Reported EPS at 0.76 vs. estimate at 0.62 (surprise of 22.6%). In Dec. 2010: Reported EPS at 1.2 vs. estimate at 0.89 (surprise of 34.8%). In March 2011: Reported EPS at 0.46 vs. estimate at 0.36 (surprise of 27.8%). In June 2011: Reported 0.22 vs. estimate at 0.16 (surprise of 37.5%. [Average earnings surprise at 30.67%]. Shares shorted have decreased from 1.28M to 1.04M over the last month, a decrease which represents about 1.13% of the company's float of 21.23M shares.
6. Dell (Nasdaq: DELL ) : Provides integrated technology solutions in the information technology (IT) industry worldwide. In Oct. 2010: Reported EPS at 0.45 vs. estimate at 0.33 (surprise of 36.4%). In Jan. 2011: Reported EPS at 0.53 vs. estimate at 0.37 (surprise of 43.2%). In April 2011: Reported EPS at 0.55 vs. estimate at 0.44 (surprise of 25%). In July 2011: Reported 0.54 vs. estimate at 0.49 (surprise of 10.2%. [Average earnings surprise at 28.7%]. Shares shorted have decreased from 78.81M to 60.64M over the last month, a decrease which represents about 1.17% of the company's float of 1.55B shares.
7. GT Advanced Technologies (Nasdaq: GTAT ) : Provides polysilicon production technology and multicrystalline ingot growth systems, and related photovoltaic (PV) manufacturing services for the solar industry worldwide. In Sept. 2010: Reported EPS at 0.28 vs. estimate at 0.24 (surprise of 16.7%). In Dec. 2010: Reported EPS at 0.46 vs. estimate at 0.38 (surprise of 21.1%). In March 2011: Reported EPS at 0.41 vs. estimate at 0.34 (surprise of 20.6%). In June 2011: Reported 0.41 vs. estimate at 0.31 (surprise of 32.3%. [Average earnings surprise at 22.68%]. Shares shorted have decreased from 21.66M to 20.09M over the last month, a decrease which represents about 1.24% of the company's float of 126.19M shares
Interactive Chart: Press Play to compare changes in analyst ratings over the last two years for the stocks mentioned above. Analyst ratings sourced from Zacks Investment Research.
Kapitall's Eben Esterhuizen does not own any of the shares mentioned above. Rebecca Lipman owns DELL. Short data sourced from Yahoo! Finance. EPS data sourced from Yahoo! Finance, all other data sourced from Finviz.
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