When a company’s performance exceeds expectations, the shareholders enjoy the impact. An earnings surprise that is positive is comparable to very few things in the stock market. A company that performs beyond expectations sends a positive message announcing the fact that there is an upward turn in their business.
The share prices on display as the third-quarter season is coming to a close emphasizes the exaggerated effect a positive earnings surprise can have on the share price. Amazon boasts of one of the best reports and earned $0.52 per share far exceeding its previous performance of $0.01. Amazon shares soared 13% in 24 hours, increasing Amazon’s market cap by an impressive $66 billion.
Predicting companies that are likely to beat the street might seem like an obvious way to partake in the gains that result from a positive earnings surprise. However, making the right predictions can problematic to pull off. In a bid to predict correctly, you might find that you are on the opposing side of successful institutions which have an unlimited access to information. Another drag on your prediction is the fact that you can hardly predict the reaction the streets will have to your report.
There is a way to make predictions about companies that will beat expectations that is more secure, and even more profitable. It’s an open secret but still manages to remain a well-kept one.
The secret to predicting which stocks will keep increasing
The Post-Earnings-Announcement Drift (PEAD), shows the drift tendency of a stock’s aggregate abnormal returns towards a positive earnings surprise for a specific period (in weeks or months) after an earnings announcement.
The chart of return distribution illustrates the fact that companies which surpass the S&P 500 in the months after a positive earnings surprise are the ones most likely to beat earnings. It also indicates that this is the best period to profit from the PEAD. Zacks Investment Research data show that earnings have increased by 0.4% from last year’s 7.2% and as a result, 73% of companies in the S&P 500 exceeded expected earnings. With the PEAD, it is easy to predict 7 global companies with positive earnings surprises that will benefit the most. They are Amazon, Apple, Facebook, Google, Microsoft, PayPal and Visa. However, the focus will be on Amazon and Apple because of their projected earnings for 2018.
Amazon’s current shareowners received good news with the best earnings surprises and a corresponding price jump for Amazon shares. A look at the PEAD also reveals that Amazon is highly likely to exceed the S&P 500 performance in the next few months. Earnings are also expected to grow by 92% in 2018 providing earnings support for Amazon as well as hitting an all-time high.
Apple continues to win in this third quarter with earnings at $2.07 beating expectations by 11%. The earnings surprise is expected to fuel Apple in the next quarter and is also expected to reach an all-time high.
Apple with its precedence of positive surprises is expected to bring more, especially since it has exceeded expectations in the past four quarters by about 6.4%. The increasing anticipation of the iPhone X during the holiday period has made analysts predict a significant earnings growth of up to 21 % in 2018. If it meets this target, then Apple could easily become the first $1 trillion dollar company on NASDAQ.
How to take advantage of this: The seven global companies listed above showed some of the most amazing results in the S&P 500. Following this, it is expected that they should exceed expectations in the following quarter. The smart thing to do will be to buy any of the top seven stocks now and hold off for the next two quarters with a view towards beating the market and partaking in positive earnings surprise.