Earnings surprises have become much less surprising. For the last few quarters, most companies small and large have been reporting earnings that have beaten Wall Street analyst estimates. Two major forces drive this outperformance.
The first is that the pace of recovery, especially at the beginning of 2009, was much faster than anyone dared predict in the dark days of the recession. It was unthinkable that the economy would stabilize, and even grow, so quickly given the depths to which it had fallen. But as the first green shoots of activity began emerging, earnings perked up faster than expected. At first, earnings were driven by cost-cutting. Firms were able to cut labor and other variable costs very quickly, and the productivity of remaining workers shot up. Now as the recovery enters the next phase, inventory restocking and even some rises in end demand are helping drive companies forward.
The second force leading to so many surprises is that many of the estimates were simply too low. With the recovery being choppy and uneven at best, it is a challenge for analysts to come out and predict that a firm is going to have a great quarter. There is considerable downside of being branded a Pollyanna in this environment. Critics can say that you didn't understand the depths of the financial crisis and dismiss you as a market cheerleader. It is much safer to come out with a conservative prediction. Executives also have the incentive to guide investors and analysts lower and then surprise on the upside. It makes it look like they are doing a better-than-expected job in navigating the downturn.
Investors seem to have figured most of this out already, and are now generally expecting firms to beat estimates pretty handedly. That explains why a lot of firms that have reported quarters that blew past analyst expectations, have seen their shares stagnate or even fall. The upside of this is that there are firms that are still producing decent earnings that the market is shrugging off. To find some of these, we used the Premium Stock Screener to find stocks that have beat earnings estimates in the last quarter and are rated 5 stars. Here are four stocks that passed. Run the screen for yourself here.
Comcast Corporation (CMSCA)
Moat: Wide | Uncertainty: Medium
From the
premium analyst report:
Comcast's decision to go after NBC Universal tarnishes our view of the firm somewhat.
