The First Cut: Positive Earnings Surprises

    The First Cut: Positive Earnings Surprises Splash image

    Expectations shape a stock’s price, so any change in the market’s perception of a company and its industry has an impact on its price.

    The quarterly earnings reporting season has become an important time for 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, 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.

    Changes in a stock’s price resulting from an earnings surprise may be immediate, but the surprise may also have a long-term price effect. This means that it may not be too late to buy into an attractive company after a better-than-expected earnings report is released. Studies indicate that the effect can persist for as long as a year after the announcement. Firms with a significant quarterly earnings surprise also often have earnings surprises in subsequent quarters.

    The stocks that made this issue’s First Cut are domestic, exchange-listed companies tracked by at least four analysts that had a significant positive quarterly surprise during July or early August. These companies are also expected by analysts to have positive earnings for their current fiscal year and they have not had downward quarterly or annual earnings estimate revisions during the past month.

    Only the top 30 stocks with the largest percentage surprise made the First Cut.

    The First Cut listing also includes the percentage change in the consensus fiscal-year estimate to indicate how analysts have adjusted their near-term expectations during the earnings season, and the four-week price change to highlight investor reaction to the announcement.