Zacks Top Earnings ESP Stocks - Investment Ideas

Zacks Investment Research
Posted: Jan 29, 2013 2:47 AM
Zacks’ Top ESP for Upcoming Earnings 012913As of yesterday, total earnings for the 150 S&P 500 companies that had already reported Q4 results were up +0.3% from the same period last year, with 63.3% of the companies beating earnings expectations with a median surprise of +2.4%. Revenues are up +4.9%, with a much stronger 62% of companies beating top-line expectations with a median surprise of +0.6%.

There are still 350 companies left to report and if we apply similar expectation/beat characteristics to those remaining companies, EPS growth would come up flat year over year.  Even with that, the S&P 500 index  is up over 15% year over year. Earnings & revenue growth has been on the decline in that time indicating a slowdown not acceleration.

But that’s not what the market is seeing...

I do agree that the S&P 500’s trailing P/E multiple of 17.50 is not terribly high if forward expectations are for 13.3.  But if revenue growth is on the decline and it seems like the most likely scenario for the U.S. is for growth to be flat and Europe to decline, where is the justification for higher prices?

The answer will lie in earnings alone; finding stocks with the greatest chances of beating estimates is the best path to finding rising stock prices on earnings and the Zacks Earnings Surprise Prediction or ESP helps target those stocks.

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.

 The 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.)

Bullish ESP Stocks

Meritage Homes (MTH) is a Zacks Rank #1 stock with a positive earnings ESP of 4.27% for the current quarter.  The company is expected to make 42 cents a share, but our ESP readings are looking for a profit of 44 cents.

The housing sector remains resilient and earnings for Meritage’s peers have been very strong as have their outlooks for the coming year.  Interest rates are expected to remain low for the next two years or so which should provoke more buyers to step up and buy.

Just today, the S&P Case-Shiller 20-city home price index showed a annualized gain of 5.5%, the highest since 2006.

With a P/E of 20, MTH is still within the realm of value if growth continues and trends remain strong.

– Meritage Homes reports earnings on January 31st.

Nationstar Mortgage Holdngs Inc (NSM) is a Zacks Rank #1 stock with a positive earnings ESP of 2% for the current quarter; the Zacks Consensus is for a per share profit of $0.65.

Sticking with the strong housing theme, Nationstar is a premier mortgage lender in the states with a portfolio worth over $425 bullion.

Nationastar recently partnered with KB Home to form Home Community Mortgage, LLC, which will be used to provide mortgage services to KB Home buyers.

Nationstar has beat the Zacks Consensus four quarters in a row at an average of 92% and is an aggressive lender in a space that is on the mend it might be worth a look.

– Nationstar reports earnings on February 6th.

AutoNation  (AN) is a Zacks Rank #2 stock with a positive earnings ESP of 3.06% for the current quarter.  The Zacks consensus estimate is for Q4 EPS of $0.65, with the most accurate estimate at $0.67. 

AutoNation has come up just shy of analysts’ expectations last quarters, but has shown steady earnings growth and is seeing bullish analyst activity ahead of their report Thursday.

Trading at just 15 times forward earnings, the stock is relatively cheap compared to others in the space and given the strength in consumer spending in the last quarter, we should see good results from AN.

– AutoNation reports earnings on January 31st.

Using Zacks Earnings ESP 
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%.

But requiring your stocks to have an ESP of greater than 1%, increases its 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 watchlist 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.

If you prefer to let someone else do all the work and have the best candidate sent to your computer, learn more about Whisper Trader now


AUTONATION INC (AN): Free Stock Analysis Report
AUTONATION INC (AN): Free Stock Analysis Report
KB HOME (KBH): Free Stock Analysis Report
KB HOME (KBH): Free Stock Analysis Report
MERITAGE HOMES (MTH): Free Stock Analysis Report
MERITAGE HOMES (MTH): Free Stock Analysis Report
NATIONSTAR MTGE (NSM): Free Stock Analysis Report
NATIONSTAR MTGE (NSM): Free Stock Analysis Report
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Zacks Investment Research