Investors are always alert during the earnings season. After all, this is the time when they decide on which stocks to pick and which one to throw out of their portfolios, based on a company’s earnings scorecard.
Among various factors that investors normally take a look at while evaluating corporate earnings, a beat seems to be the most crucial.
What is Earnings Beat?
Investors always try to prepare themselves ahead of time and look for stocks that are likely to come up with a stellar performance. After much brainstorming, Wall Street analysts project earnings of companies. These estimates act as investment leads.
A positive earnings surprise or earnings beat is typically the case when actual or reported earnings come in above the consensus estimate. Historically, if a company’s earnings manage to beat market expectations, its stock surges post release.
What Makes Earnings Beat Superior to Earnings Growth?
A 20% earnings rise (though apparently looks good) doesn’t tell you everything about the company’s performance. This might represent a decelerating earnings growth over the years or quarters, raising questions over the company’s fundamentals.
Also, seasonal fluctuations come into the play sometimes. If a company’s Q1 is seasonally weak and Q4 is strong, then it is likely to report a sequential earnings decline. In such cases, growth rates are misleading while judging the true health of a company. On the other hand, analysts put together their insights and a company’s guidance when giving an earnings estimate.
How to Find Stocks that Can Beat?
Now, since it is difficult to predict if a company will beat or miss in the upcoming earnings season, investors can check the earnings surprise history. An impressive track in this regard generally acts as a catalyst in sending a stock higher. It indicates the company’s ability to surpass estimates. And investors generally believe that the company will have the same trick up its sleeve or in other words is smart enough to beat on earnings in its next release.
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