What are we looking for?
U.S.-listed companies with the potential to surprise analysts and investors when they report financial results in this quarterly earnings season.
The screen
Corporate America is in the middle of its biggest earnings week in more than a decade. Some 190 members of the S&P 500 report this week, accounting for roughly 40 per cent of the index's value. A stronger-than-expected earnings report can cause a company's stock to spike, so identifying companies that will surprise the market can be very valuable.
SmartEstimate, a Thomson Reuters proprietary measure, is an improvement over the mean or "Street" estimate. The mean estimate assigns an equal weight to every analyst, whereas the SmartEstimate assigns each a different weight based on how recent their estimate was made and how accurate they have been in the past. This leads to a more predictive estimate, evidenced by the fact that if the "predicted surprise" (SmartEstimate minus mean estimate) is greater than 2 per cent, there is an 80-per-cent chance that the reported figure will indeed beat the estimate.
With that in mind, we screen for companies in the S&P 500 yet to report with an EPS 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, we consider growth – both top-line and bottom-line. The first-quarter SmartEstimate for earnings growth (year over year) is an aggregate of 15.9 per cent for this universe of companies. We exclude any name with a growth estimate lower than this. The SmartEstimate for first-quarter revenue growth (year over year) must be at least 5 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?
The screen yields a list of nine companies, three of which are oil and gas exploration and production companies. Devon Energy Corp. also controls a midstream business, making it the most vertically integrated of the three. This vertical integration makes it more resilient to oil and gas shocks than companies purely focused on production.
XL Group Ltd. is particularly attractive from a valuation standpoint. XL is an insurance and reinsurance company with clients in more than 200 countries and underwriting operations in the United States, Canada, Bermuda, Hong Kong, Malaysia, Australia, China, Singapore and throughout Latin America.
Perhaps the most opportunistic investment is Mosaic Co., which is down more than 7 per cent over four weeks. Mosaic mines and produces phosphates in Florida and Louisiana, and potash in Canada. It markets phosphate and potash-based crop nutrients and animal feed internationally as well as providing ancillary services to retailers and farmers in South America and Asia-Pacific.
Investors are advised to do further research before investing in any of the stocks listed here.
Hugh Smith, MBA, works in the financial and risk unit of Thomson Reuters and specializes in wealth and asset management.