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.

The Winning Strategy

In order to shortlist stocks that are likely to come up with an earnings surprise, we chose the following as our primary screening parameters.

Last EPS Surprise greater than or equal to 10%: Stocks delivering positive surprise in the last quarter tend to surprise again.

Average EPS Surprise in the last four quarters greater than 20%: We lifted the bar for outperformance slightly higher by setting the average EPS surprise for the last four quarters at 20%.

Average EPS Surprise in the last two quarters greater than 20%: This points to a more consistent surprise history and makes the case for another surprise even stronger.

In addition, we place a few other criteria that push up the chance of a surprise.

Zacks Rank less than or equal to 2: Only companies with a Zacks Rank of #1 (Strong Buy) or 2 (Buy) can get through.

Earnings ESP greater than zero: A stock needs to have both a positive Earnings ESP and a Zacks Rank of #1, 2 or 3 (Hold) for an earnings beat to happen, as per our proven model.

In order to zero in on those that have long-term growth potential and high trading liquidity we have added the following parameters too:

Next 3-5 Years Estimated EPS Growth (Per Year) greater than 10%: Solid expected earnings growth exhibits the stock’s long-term growth prospects.

Average 20-day Volume greater than 100,000: High trading volume implies that the stocks have adequate liquidity.

A handful of criteria narrowed down the universe from over 7,700 stocks to around 12.

Here are five out of the 12 stocks:

Zynga Inc. (ZNGA - Free Report) : The company is a social game developer. It has a VGM Score of C. The stock belongs to a Zacks Industry Rank is in the top 9% and has a Zacks Rank #1.

Callaway Golf Company (ELY - Free Report) : The company develops products that help golfers hit longer and straighter shots. The stock carries a Zacks Rank #2 and has a VGM Score of A. Its Zacks Industry Rank is in the top 13%.

Zumiez (ZUMZ - Free Report) : This specialty retailer of action sports carries a Zacks Rank #2. Its Zacks Industry Rank is in the top 37%. It has a VGM Score of B.

Fortinet Inc. (FTNT - Free Report) : This provider of network security appliances carries a Zacks Rank #2. The stock has a VGM Score of B and the Zacks Industry Rank is in the top 19%.

NVIDIA Corp (NVDA - Free Report) : This is a leading company in graphics processors and media communications’ devices. The stock has a Zacks Rank #1 and the Zacks Industry Rank is in the top 3%.