The First Cut: Momentum Stocks With Positive Earnings Surprises

    by John Bajkowski

    The First Cut: Momentum Stocks With Positive Earnings Surprises Splash image

    The First Cut is designed as a starting point for investors. Each issue we list the top 30 stocks that pass relatively simple screens of interest to individual stock pickers. AAII’s Stock Investor Pro screening software is used to generate the First Cut listing.

    When the markets are volatile, it can be illuminating to observe companies that are surpassing investor expectations and rewarding investors with above-average price strength. The quarterly earnings reporting season allows investors to see whether the expectations of the majority of analysts have been correct, or whether they need adjustment. Services such as I/B/E/S, Thomson-Reuters, First Call, and Zacks provide consensus earnings estimates by tracking the estimates of thousands of analysts.

    This issue’s First Cut examines stocks that have reported quarterly earnings that surpassed the consensus forecast—a positive earnings surprise coupled with above-average relative price strength.

    The stocks that made this issue’s First Cut are domestic, exchange-listed companies tracked by at least four analysts that have had a significant positive quarterly surprise since the beginning of July. These companies are also expected by analysts to have positive earnings for their current fiscal year and no analysts have lowered their near-term quarterly or annual earnings estimate during the past month. To filter for price strength, companies were required to have a relative price strength rank of 50% or higher over the last 4-, 13-, 26-, and 52-week periods. The 30 stocks with the greatest relative strength rank over the last four weeks made the First Cut. The 52-week relative strength rank figure in the table provides a longer-term price performance perspective. The forward price-earnings ratios (price divided by expected earnings per share) and the price-to-book-value ratios provide a feel for the valuation levels of these stocks. The market cap (share price times number of shares outstanding) indicates the size of the passing firms.

    While positive earnings surprises normally have an immediate impact on stock prices, it is not uncommon for the impact of the surprise to be felt for up to a year. Firms with a significant quarterly earnings surprise often have earnings surprises in subsequent quarters.


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