First quarter earnings season is about to move into full swing. It is said that earnings are the mother’s milk of stock profits. That makes sense, right? The more money a company makes the higher its stock price should go.
And you know what? There are studies that show companies that deliver bullish earnings surprises tend to outperform afterwards, for at least 60-days. It’s called Post Earnings Announcement Drift (PEAD). (1)
We’ve put together a list of great, FREE resources for investors who want to trade earnings, perhaps before and afterwards. We’ll share a quick way to create your own estimate so you can have a sense of which companies might beat or miss Wall Street’s expectations in advance.
Step One:
Head to Yahoo’s earnings’ calendar. It shows how many companies are expected to report their quarterly results and on what day.
https://finance.yahoo.com/calendar/earnings
Step Two:
Click on a symbol and then the ANALYSIS link above the stock chart.
There you will see Wall Street’s estimates for earnings per share (EPS) and Revenue.
Make note of the consensus estimate for the current quarter. Then, page down to the Earnings History section. Once there, you’ll see a column for SURPRISE % for the past four-quarters. Take the four percentages and average them.
Take the average of the earnings surprises and multiply it by the consensus earnings estimate. Then, add the figure from the consensus estimate.
(2.9% + 16.7% + 2.7% + 3%)/4 = 6.325% x $0.37 consensus estimate = $0.0234 (round to nearest penny i.e $0.02) Add $0.02 + $0.37 = $0.39.
If the average surprise is negative, it will create a negative number and reduce the consensus estimate.
Step Three:
Go to Zacks.com and enter the same symbol in the upper right-hand corner to go to their stock quote page.
In the left-hand column, you’ll see a menu item for detailed estimate, click on it.
Page down to the Earnings Estimate section, look at the current estimate, the most recent consensus, then determine the difference and add it from Yahoo’s consensus estimate (not the one you created by adding/subtracting the average surprise, but the current consensus).
Most recent $0.36 – Zacks Consensus $0.37 = -$0.01. Yahoo Consensus $0.37 + Zacks Difference -$0.01 = $0.36.
Sometimes, Zacks’ estimate and Yahoo’s are different. It’s important to use one consensus as the standard. Since Yahoo’s numbers are more widely used, we use them as the standard.
Next, continue to page down to the Upside – Most Accurate Estimate Versus Zacks Consensus. Determine the difference between the Most Accurate Estimate and the Zacks Consensus Estimate. Once again, take the difference and add it to Yahoo’s consensus estimate.
Most Accurate Estimate $0.37 – Zacks Consensus Estimate $0.37 = $0.00. Yahoo consensus $0.37 +Most Accurate Estimate difference $0.37.
Step Four:
Now you have three numbers, take them and average them. That’s your estimate.
(Average Surprise Estimate $0.39 + Most Recent Consensus Estimate $0.36 + Most Accurate Estimate $0.37)/3 = $0.37333. Again, rounded to the nearest penny, $0.37 is now your estimate.
Now, take the difference between your estimate and yahoo’s consensus estimate and that’s the projected surprise.
Your estimate $0.37 – Yahoo Consensus Estimate $0.37 = $0.00 surprise.
It’s not perfect, nothing is, but has proven to be a very useful tool in our experience.
1 – https://en.wikipedia.org/wiki/Post%E2%80%93earnings-announcement_drift