Arguably, corporate earnings are the most keenly watched events by investors. Earnings theoretically determine the growth or contraction of companies as well as their stocks. In fact, bulk of the research on Wall Street is centered on whether earnings numbers really drive share prices. While companies may try every trick in the book to impress its investors, what ultimately catches their eye is the earnings performance compared to market expectations.

Q1 Earnings Season Winding Down

The first-quarter earnings season is almost over with just around 10% of the S&P 500 members left to report their results. We now have Q1 results from 446 S&P 500 members that combined account for 91.9% of the index’s total market capitalization. According to our latest Earnings Outlook report, total earnings for these companies are up 14% from the same period last year on 7.9% higher revenues, with 72.4% delivering positive earnings surprises and 66.4% beating revenue estimates.

Energy Earnings Soar

The ‘Energy’ sector – whose year-earlier comparison was to an aggregate loss – stood out as one of the best performers of the Q1 earnings season. With all sector components on the S&P 500 index having reported results, total earnings had very strong year-over-year dollar growth on 33.8% higher revenues. While 69.7% of the companies have been successful in beating earnings estimates, 63.6% of them have outperformed the topline.

Concerns Remain Despite Optimism

Despite hope offered by the biggest oil deal in a decade and a new pro-fossil fuel administration in the White House, crude prices have been on a freefall over the past few weeks, erasing all the gains associated with the OPEC-led output cut. The continued rise in domestic production thanks to soaring shale output have dragged down the commodity below the psychologically-critical $50 threshold. In other words, while OPEC's moves to trim output and rebalance the demand-supply situation has stabilized the market to a large extent, in the process it has incentivized shale drillers to churn out more.

Earnings Power

In the midst of such uncertainty, earnings performance has emerged as a decisive factor behind a stock’s performance. Speculations regarding earnings beat or miss have become a fundamental concern for investors that can either cheer or upset to the point of a hasty sell-off. Considered Wall Street’s dirty little secret, the formidable importance of earnings surprises can just not be ignored, whether you like it or not.

But from a broader perspective, it is the analysts’ consensus about the inherent strength of companies, coupled with their earnings performance, which should be closely followed for gaining better understanding about how to boost one’s portfolio.

Specifically, a history of positive earnings surprise generally works as a catalyst in sending a stock higher. It indicates the company’s ability to surpass the estimates. So, investors take it in their consideration while betting on the stock with the expectation that the company will do the same trick to outpace the estimates in the upcoming release.

The Investing Way

Amid these ups and downs, investors need to hunt for stocks that will hold steady when the broader industry is volatile. With the help of the Zacks Stock Screener, we have zeroed-in on four stocks that flaunt a Zacks Rank #1 (Strong Buy) or 2 (Buy), and have convincingly beaten earnings estimates in the past four quarters. You can see the complete list of today’s Zacks #1 Rank (Strong Buy) stocks here. Further, we have avoided companies having market-cap of less than $100 million.

Finally, the chosen ones have VGM Score less than or equal to B. Here V stands for Value, G for Growth and M for Momentum and the score is a weighted combination of these three scores. Such a score allows you to eliminate the negative aspects of stocks and select winners.

However, it is important to keep in mind that each Style Score will carry a different weight while arriving at a VGM score. Our research shows that stocks with a VGM Score of ‘A’ or ‘B’ when combined with a Zacks Rank #1 or #2 offer the best upside potential.

Subsea 7 S.A. (SUBCY - Free Report) : London-based Subsea 7 is a leading oilfield contractor engaged in the designing, procurement, building, installation, and servicing of a range of offshore surface and sub-surface equipment for the oil and gas industry.

Zacks Rank: #1

Average EPS Surprise in the Last 4 Quarters: 93.96%

VGM Score: ‘B’

Subsea 7 SA Price and EPS Surprise

Subsea 7 SA Price and EPS Surprise| Subsea 7 SA Quote

McDermott International Inc. (MDR - Free Report) : Incorporated in 1959, Houston, TX-based McDermott International is an engineering and construction company, solely focused on the offshore oil and gas business.

Zacks Rank: #2

Average EPS Surprise in the Last 4 Quarters: 387.50%

VGM Score: ‘B’

McDermott International, Inc. Price and EPS Surprise

McDermott International, Inc. Price and EPS Surprise | McDermott International, Inc. Quote

Repsol S.A. - ADR (REPYY - Free Report) : Repsol is Spain’s largest energy company, which is engaged in oil and gas exploration and production, refining and marketing of petroleum products, and other energy-related businesses.

Zacks Rank: #2

Average EPS Surprise in the Last 4 Quarters: 46.34%

VGM Score: ‘A’

Repsol SA Price and EPS Surprise

Repsol SA Price and EPS Surprise| Repsol SA Quote

W&T Offshore Inc. (WTI - Free Report) : An exploration and production company headquartered in Houston, TX, W&T Offshore focuses primarily in U.S. Gulf of Mexico’s shallow water shelf.

Zacks Rank: #2

Average EPS Surprise in the Last 4 Quarters: 69.21%

VGM Score: ‘A’

W&T Offshore, Inc. Price and EPS Surprise

W&T Offshore, Inc. Price and EPS Surprise | W&T Offshore, Inc. Quote

Bottom Line

Historical earnings surprise can be viewed as a key metric for share price outperformance and can greatly increase your odds of grabbing big winners.