Alcoa AA unofficially
kicked off earnings season yesterday with a decent report. The Aluminum giant actually came in line with
the Zacks Consensus of 7 cents and came up slightly short on the revenue
side. The report was initially viewed
with a positive light due to the increase in aluminum demand Alcoa was seeing.
shares of Alcoa moved lower today after investors had time to examine the details.
important to note that the earnings bar remains extremely low and has come down
substantially over the last quarter from close to 4% year over year growth to
now just 0.3%.
the low expectations, it will be challenging to find companies that beat earnings
estimates especially being that revenues are down year over year and the global
consumer is barely hanging on.
spot for growth may be the financial space; our Director of Research, Sheraz
Mian noted this in a note to investors HERE.
The three financial stocks below all have increased probability of a
beat with their positive ESPs, but are certainly not the strongest ESP stocks
that I have seen.
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.
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.)
Morgan (JPM) is a Zacks Rank #2 (buy) stock with a positive earnings ESP
of 2.82% for the current quarter. The company is expected to make $1.42 cents
a share, but our ESP readings are looking for a profit of $1.46 cents.
been looking strong over the last week or so and shares are approaching the 52
week high of $55.90 going into the report.
valuation of just 9 times forward earnings and a man like Jamie Dimon at the
helm, analysts seem to be looking for a beat from this financial giant on
JP Morgan reports earnings on July 12th
Fargo & Co. (WFC) is a Zacks Rank #3 stock with a positive earnings ESP
of 1.10% for the current quarter; the Zacks Consensus is for a per share profit
of $0.92, with the most accurate at $0.93.
Fargo is the largest loan originator in the U.S. and their earnings calls are
always good information for the direction of the housing market.
rise in home values and relative strength in new and existing home sales, it should
be a good quarter for Wells. Of course, a rising interest rate has pros
and cons for banks of their size, but the overall analyst consensus seems to be
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
WFC’s last report. It’s important to note that despite the positive analyst
actions, ESPs are mixed looking forward in time as the future of housing is
still a little murky.
Wells Fargo reports earnings on July 12th
Ameritrade (AMTD) is a Zacks Rank #2 stock with a positive earnings ESP of 3.23%
for the current quarter. The Zacks consensus estimate is for Q1 EPS of
$0.31 with the most accurate estimate coming in at $0.32.
recently published a story about the rising popularity of “hobby
trading” by baby boomers, mainly in options and stocks which would
certainly benefit companies like AMTD.
Ameritrade has also been seeing positive analyst flow over the last 2 months
leading into their report next week, which is usually a good sign for stocks
looking to beat.
trading at 23 times forward earnings.
AMTD reports earnings on July 23rd
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.
prefer to let someone else do all the work and have the best candidates sent to
your inbox, learn more about Whisper Trader
Jared A Levy is one of the
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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
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ALCOA INC (AA): Free Stock Analysis Report
TD AMERITRADE (AMTD): Free Stock Analysis Report
JPMORGAN CHASE (JPM): Free Stock Analysis Report
WELLS FARGO-NEW (WFC): Free Stock Analysis Report
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