Low P/E Stocks With Positive Earnings Surprises

A stabilizing economy and improvement in productivity helped to usher in a wave of positive surprises this past quarter. Seventy-two percent of the stocks covered by AAII’s Stock Investor Pro screening program reported quarterly earnings that surpassed the consensus forecast—the definition of a positive earnings surprise. Contrarian investors have observed that positive surprises are even more dramatic events for value-oriented stocks since the surprise often triggers a change (for the better) in the market perception of a company.

This issue’s First Cut screens for stocks with below-average forward price-earnings ratios (price divided by expected earnings per share) that have reported a positive earnings surprise and upward revisions in future earnings expectations.

While there is an immediate market reaction to a surprise or an earnings revision, there is often a long-term price impact as well—supporting the notion that it may not be too late to buy an attractive company after a better-than-expected earnings report. Studies indicate that a positive effect can persist for as long as a year after the announcement.

The stocks that made this issue’s First Cut are exchange-listed companies tracked by at least four analysts that had a significant positive quarterly surprise since the beginning of September with a below-average forward price-earnings ratio. These companies have also seen at least a 5% increase during the last month in their consensus earnings estimates for their current and following fiscal years, and they are expected by analysts to have positive earnings. Only the top 30 stocks with the largest percentage surprise made the First Cut.

The listing also includes the percentage change in the consensus fiscal-year estimate, to indicate how analysts have adjusted their expectations; the consensus long-term earnings growth rate estimate; and the 13- and 52-week relative price strength ranks, to highlight short- and long-term price momentum.

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