What are we looking for?
Companies with the potential to surprise analysts and investors when they report financial results in this upcoming quarterly earnings season.
The screen
Earnings season has just begun, and 98 per cent of the companies in the S&P/TSX composite index are yet to report. All eyes will be on whether these companies beat their consensus estimates, which is the simple average of the estimates of all sell-side analysts covering the firm.
However, not all analysts are equally accurate, and by acknowledging this the consensus estimate can be improved. SmartEstimate, a Thomson Reuters' proprietary measure, is a weighted average of these estimates – the estimates are weighted based on how recently they were made, and how accurate the analyst has been in the past.
This leads to a more predictive estimate, evidenced by the fact that if SmartEstimate's "predicted surprise" (SmartEstimate minus mean estimate) is greater than 2 per cent, there is an 80-per-cent chance the stock will beat the estimate.
With that in mind, we screen for companies in the S&P/TSX composite index yet to report with a SmartEstimate earnings-per-share predicted surprise greater than 2 per cent.
Revenue is less important than bottom-line earnings in this case, as earnings are what ultimately drive stock prices, so in considering top-line estimates we only filter out companies with a negative revenue predicted surprise.
Next, to exclude companies that aren't achieving top-line and bottom-line growth we look for companies that have a first-quarter year-over-year SmartEstimate for both earnings and revenue growth of greater than 10 per cent.
Finally, to avoid companies whose positive predicted surprise has already been priced in by the market, we eliminate companies whose four-week price change is greater than 10 per cent.
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What did we find?
This screen yields only six stocks, and two are down 12 per cent or more over the past four weeks. This is potentially a sign that the likelihood of a strong earnings report has not yet been priced in by the market, and it could be an opportune time to buy.
Labrador Iron Ore Royalty Corp.'s earnings should benefit from higher iron ore prices seen in the first quarter. The company is currently rated "outperform" by RBC Dominion Securities with a price target of $24, more than 40 per cent above its current price. Labrador owns 15 per cent of the Carol Lake mine in Labrador City, Nfld. Another 60 per cent is owned by Rio Tinto, which plans to release the mine's production results after market close Wednesday.
HudBay Minerals Inc. is also a promising investment. Its operations include the exploration, production and marketing of base and precious metals with assets in Canada, the United States and South America. Updated plans for its Lalor mine in Manitoba should allow the company to raise zinc production and take advantage of the current strong zinc prices.
Hugh Smith, MBA, works in the financial and risk unit of Thomson Reuters and specializes in wealth and asset management.