3 stocks likely to beat earnings estimates

Rambus, Capital One and American Electric Power could get a bump up next week.

By Zacks.com Jul 17, 2013 1:39PM

copyright CorbisBy Jared Levy 

 

The Q2 earnings season is well underway. By late last week, 29 S&P 500 members had reported, and the results were a mixed picture, as we saw in Q1. The 29 companies had earnings and revenue growth comparable to Q1, but the beat ratios -- companies coming out with positive surprises -- were modestly weaker on the earnings side and about the same on the revenue side.


Over the last few days, financials have really stood out. Earnings from the likes of JP Morgan Chase (JPM), Wells Fargo (WFC), Citigroup (C) and Goldman Sachs (GS) have given the market a boost. Bernanke is on deck with his house testimony beginning tomorrow, and earnings are due from Bank of America (BAC), PNC Bank (PNC), Intel (INTC), IBM Corp. (IBM), eBay (EBAY) and many more.


Stocks are going to have a ton to digest in the coming weeks and volatility is sure to remain elevated, so make sure you're prepared!


As we continue our search for stocks that have a high likelihood of beating estimates, the Zacks Earnings ESP can be a useful tool. The Earnings ESP shows the percentage difference between the Most Accurate Estimate and the Consensus. It helps predict earnings surprises to the upside and downside; the greater the ESP (positive or negative) the greater the likelihood of a surprise. Of course, some ESP numbers are better than others. Over the last 10 years, we have found that stocks with a positive ESP and with a Zacks Rank of 1, 2 or 3 ("strong buy," "buy" or "hold"), produced a positive surprise 70% of the time. The other 9% of the time, they reported in line with expectations, with a negative surprise occurring only 21% of the time.

 

Here are three companies that look promising next week:


Rambus Inc (RMBS) is a Zacks Rank No. 1 stock with a positive earnings ESP of 9.09% for the current quarter.  The company is expected to lose 11 cents a share, but our ESP readings are looking for a smaller loss of  10 cents.

 

Rambus recently won back an important patent dispute in appeals court.  On that news, shares have nearly doubled. Rambus is expected to continue to turn its business around and move back into the black by 2014. There is no doubt that this is a higher risk stock with its recent rally and spotty financials.  But if Rambus can not only beat this quarter, but offer some strong guidance for the future, shares could march higher. Rambus reports earnings on July 18.

 

Capital One Financial (COF) is a Zacks Rank No. 2 stock with a positive earnings ESP of 1.2% for the current quarter; the Zacks Consensus is for a per share profit of $1.72, with the most accurate at $1.74.


What's in your wallet?  Apparently investors think there's a wad of cash in Capital One's. Despite a small rise in delinquency rates on loans, analysts on average are bullish going into the report and have been moving their estimates higher over the last two  months. Financials have been a bright spot in this otherwise drab earnings season and hopefully we will see the same from Capital One. Although risks may be slightly elevated, it still trades at just 10 times forward earnings -- well within the sector's average range. Capital One reports earnings on July 18.


American Electric Power (AEP) is a Zacks Rank No. 3 stock with a positive earnings ESP of 5% for the current quarter. The Zacks Consensus Estimate is for a profit of $0.80 this quarter and the most accurate consensus comes in at a profit of $0.84.


American Electric Power is a public utility holding company that throws off a modest dividend yield of 4.15%. Substantially all of the operating revenues are derived from electric service. Coming into the report, shares are trading at 14.76 times forward earnings; analysts are looking for 3.56% earnings growth on a 1.5% increase in revenue in 2013. AEP rallied last quarter on a very similar earnings expectation. This time around, the picture looks even more favorable. AEP reports earnings on July 19.


Jared Levy is a highly sought after trader and former member of three major stock exchanges. He frequently appears on Fox Business, CNBC and Bloomberg. He has written "Your Options Handbook" and "The Bloomberg Visual Guide to Options." 


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