Earnings Surprises: Short Sellers Think These Stocks Are Going Higher

Earnings Surprises: Short Sellers Think These Stocks Are Going Higher

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Earnings season is upon us and one very interesting point to consider is the recent history of earnings surprises for the reporting companies.

The concept of an earnings surprise is pretty simple – the quarterly earnings come out, and earnings analysts are “surprised” by how they don’t match up to their predictions. A surprise can indicate either positive or negative earnings, meaning the annual reports are above or below analysts’ earnings estimates.

“Surprise” doesn’t necessarily have to mean shocking either, it can be a the difference of a few cents between what earning analysts predicted and what the company actually reports.

To be clear, earnings typically refer to after-tax net income.

Analysts pay close attentions to earnings. Whenever a company releases earnings data that beats analyst expectations, the stock will often rise in value to price in the good news. Negative earning surprises usually leads to a drop in share price.

To get the original earnings estimates, earning analysts conduct lengthy research into a company’s financials and business. Beyond merely looking at accounting numbers, analysts use forecasting models, research new products, market and industrial trends, larger economic trends, etc. As a result, their opinions are usually considered by investors for guidance or as a benchmark of what “experts” expect.

Of course, analysts cannot perfectly predict the future, so individual earning expectations could be far off the mark. Also, analysts differ in opinion and skill, so estimates can vary greatly.

 

A Few Investing Ideas

Interested in exploring companies that have a track record of beating analyst estimates?

For ideas, we started with a universe of about 170 stocks that have a history of beating analyst earnings estimates.

From this universe, we collected data on short seller trends, and identified the names that have seen a significant decrease in shares shorted over the last month (i.e. short sellers have reduced bearish bets).

Short sellers appear to think the upside potential of these names outweigh the downside. Considering the track record of these stocks relative to analyst earnings estimates, do you agree?

List sorted by average earnings surprise.

 

 

1. Advanced Micro Devices, Inc. (AMD, Earnings, Analysts, Financials): Operates as a semiconductor company in the United States, Japan, China, and Europe. In Sep 2010: Reported EPS at 0.15 vs. estimate at 0.06 (surprise of 150%). In Dec 2010: Reported EPS at 0.14 vs. estimate at 0.11 (surprise of 27.3%). In Mar 2011: Reported EPS at 0.08 vs. estimate at 0.05 (surprise of 60%). In Jun 2011: Reported 0.09 vs. estimate at 0.08 (surprise of 12.5%. [Average earnings surprise at 62.45%]. Shares shorted have decreased from 94.26M to 80.49M over the last month, a decrease which represents about 2.36% of the company’s float of 583.28M shares.

 

2. SkyPeople Fruit Juice, Inc. (SPU, Earnings, Analysts, Financials): Produces and sells fruit juice concentrates, fruit beverages, and other fruit related products primarily in the People’s Republic of China. In Jun 2010: Reported EPS at 0.22 vs. estimate at 0.08 (surprise of 175%). In Sep 2010: Reported EPS at 0.15 vs. estimate at 0.13 (surprise of 15.4%). In Dec 2010: Reported EPS at 0.46 vs. estimate at 0.35 (surprise of 31.4%). In Mar 2011: Reported 0.2 vs. estimate at 0.17 (surprise of 17.6%. [Average earnings surprise at 59.85%]. Shares shorted have decreased from 689.53K to 516.30K over the last month, a decrease which represents about 1.52% of the company’s float of 11.40M shares.

 

3. US Airways Group, Inc. (LCC, Earnings, Analysts, Financials): Provides air transportation for passengers and cargo. In Sep 2010: Reported EPS at 1.23 vs. estimate at 1.17 (surprise of 5.1%). In Dec 2010: Reported EPS at 0.17 vs. estimate at 0.06 (surprise of 183.3%). In Mar 2011: Reported EPS at -0.68 vs. estimate at -0.72 (surprise of 5.6%). In Jun 2011: Reported 0.56 vs. estimate at 0.53 (surprise of 5.7%. [Average earnings surprise at 49.92%]. Shares shorted have decreased from 24.34M to 20.62M over the last month, a decrease which represents about 2.51% of the company’s float of 148.33M shares.

 

4. ReachLocal, Inc. (RLOC, Earnings, Analysts, Financials): Provides a suite of online marketing and reporting solutions for the small and medium-sized businesses (SMBs) in North America and internationally. In Sep 2010: Reported EPS at -0.1 vs. estimate at -0.18 (surprise of 44.4%). In Dec 2010: Reported EPS at -0.1 vs. estimate at -0.16 (surprise of 37.5%). In Mar 2011: Reported EPS at -0.12 vs. estimate at -0.18 (surprise of 33.3%). In Jun 2011: Reported -0.03 vs. estimate at -0.12 (surprise of 75%. [Average earnings surprise at 47.55%]. Shares shorted have decreased from 2.50M to 2.24M over the last month, a decrease which represents about 2.83% of the company’s float of 9.20M shares.

 

5. American Axle & Manufacturing Holdings Inc. (AXL, Earnings, Analysts, Financials): Engages in the manufacture, engineering, design, and validation of driveline and drivetrain systems, and related components and chassis modules for automotive industry in the United States. In Sep 2010: Reported EPS at 0.52 vs. estimate at 0.39 (surprise of 33.3%). In Dec 2010: Reported EPS at 0.47 vs. estimate at 0.39 (surprise of 20.5%). In Mar 2011: Reported EPS at 0.5 vs. estimate at 0.38 (surprise of 31.6%). In Jun 2011: Reported 0.69 vs. estimate at 0.44 (surprise of 56.8%. [Average earnings surprise at 35.55%]. Shares shorted have decreased from 11.72M to 10.29M over the last month, a decrease which represents about 2.21% of the company’s float of 64.70M shares.

 

6. Lincoln Educational Services Corporation (LINC, Earnings, Analysts, Financials): Provides career-oriented post-secondary education services in the United States. In Sep 2010: Reported EPS at 0.76 vs. estimate at 0.62 (surprise of 22.6%). In Dec 2010: Reported EPS at 1.2 vs. estimate at 0.89 (surprise of 34.8%). In Mar 2011: Reported EPS at 0.46 vs. estimate at 0.36 (surprise of 27.8%). In Jun 2011: Reported 0.22 vs. estimate at 0.16 (surprise of 37.5%. [Average earnings surprise at 30.67%]. Shares shorted have decreased from 1.28M to 1.04M over the last month, a decrease which represents about 1.13% of the company’s float of 21.23M shares.

 

7. Dell Inc. (DELL, Earnings, Analysts, Financials): Provides integrated technology solutions in the information technology (IT) industry worldwide. In Oct 2010: Reported EPS at 0.45 vs. estimate at 0.33 (surprise of 36.4%). In Jan 2011: Reported EPS at 0.53 vs. estimate at 0.37 (surprise of 43.2%). In Apr 2011: Reported EPS at 0.55 vs. estimate at 0.44 (surprise of 25%). In Jul 2011: Reported 0.54 vs. estimate at 0.49 (surprise of 10.2%. [Average earnings surprise at 28.7%]. Shares shorted have decreased from 78.81M to 60.64M over the last month, a decrease which represents about 1.17% of the company’s float of 1.55B shares.

 

8. Orient Paper, Inc. (ONP, Earnings, Analysts, Financials): Engages in the production and distribution of paper and paper products in the People’s Republic of China. In Mar 2010: Reported EPS at 0.21 vs. estimate at 0.17 (surprise of 23.5%). In Dec 2010: Reported EPS at 0.29 vs. estimate at 0.21 (surprise of 38.1%). In Mar 2011: Reported EPS at 0.26 vs. estimate at 0.2 (surprise of 30%). In Jun 2011: Reported 0.32 vs. estimate at 0.27 (surprise of 18.5%. [Average earnings surprise at 27.52%]. Shares shorted have decreased from 608.22K to 382.48K over the last month, a decrease which represents about 1.71% of the company’s float of 13.21M shares.

 

9. GT Advanced Technologies, Inc. (GTAT, Earnings, Analysts, Financials): Provides polysilicon production technology and multicrystalline ingot growth systems, and related photovoltaic (PV) manufacturing services for the solar industry worldwide. In Sep 2010: Reported EPS at 0.28 vs. estimate at 0.24 (surprise of 16.7%). In Dec 2010: Reported EPS at 0.46 vs. estimate at 0.38 (surprise of 21.1%). In Mar 2011: Reported EPS at 0.41 vs. estimate at 0.34 (surprise of 20.6%). In Jun 2011: Reported 0.41 vs. estimate at 0.31 (surprise of 32.3%. [Average earnings surprise at 22.68%]. Shares shorted have decreased from 21.66M to 20.09M over the last month, a decrease which represents about 1.24% of the company’s float of 126.19M shares

 

 

(List compiled by Eben Esterhuizen, CFA)

 

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