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
2. US Airways Group
4. American Axle & Manufacturing Holdings
5. Lincoln Educational Services
7. GT Advanced Technologies
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.