In the spring of 2020, Wall Street’s analysts gave up.
The world had shut down. Nobody knew what a quarter of earnings would even look like anymore, so the analysts did the only safe thing they could.
They cut their numbers to the floor and waited.
Companies stepped right over them.
When the results came in that summer, corporate America beat those estimates by 23.2% in aggregate.
It was the widest margin FactSet had ever recorded.
And it was not a triumph.
It was a measure of how far expectations had fallen.
That record stood for six years.
It finally fell last quarter.
Eighty-six percent of S&P 500 Index companies beat their estimates, the highest rate since 2021, against a five-year average of 78%.
In aggregate, they beat by 29.2%.
That is the widest margin on record.
But here’s what makes this time different.
This time, nobody had cut a thing. Analysts raised their numbers all summer. Companies smoked them anyway.
And the market barely cared.
The most anticipated report of the entire season landed Tuesday night.
Nvidia Corp. (NVDA) reported revenue up 106%. That’s an $89 billion quarter out of a single division. The company has a $2 trillion backlog. And the stock initially fell. It took the whole conference call to talk it back up.
Beating expectations has stopped being enough. And next week gives us a clean experiment to show you why.
Twelve companies report earnings. Ten are expected to earn dramatically more than they did last quarter. Two are expected to earn less.
Adam’s system rates exactly one of those 12 Bullish.
That’s not a coincidence.
It’s the difference between knowing a company is going to grow… and knowing whether the market has already priced that growth in.
“Bullish” Earnings to Watch
These stocks are expected to beat their earnings per share (EPS) from the previous quarter. And if those expectations are met or exceeded, they could potentially trade higher.
For this screen, stocks must meet four criteria:
- 10 or more analysts cover the stock.
- The average analyst recommendation is a “Buy.”
- It BEAT analysts’ EPS estimates for the previous quarter.
- The average analyst estimate for the current quarter’s EPS is greater than the previous one.
Here are 10 companies that made this week’s list:
Start with the 10. They screened bullish for one reason. Each is expected to earn more next quarter than it earned last quarter, and some of the gaps are enormous.
Broadcom Inc. (AVGO) is expected to earn $3.22 per share after reporting $1.91. Zscaler Inc. (ZS) swings from a $0.09 loss to a $1.09 profit. DocuSign Inc. (DOCU) nearly triples. Guidewire Software Inc. (GWRE) almost quintuples.
On paper, this is a murderers’ row.
Then I ran them through the ratings. Three came back Neutral. Five came back Bearish. Two came back High-Risk. Zero came back Bullish.
Here is the trap.
An earnings estimate tells you where a company is going. It tells you nothing about where that company has been.
Three of these 10 are climbing out of negative earnings. Zscaler, GitLab Inc. (GTLB) and Asana Inc. (ASAN) all lost money last quarter. You cannot calculate a percentage gain from a loss.
A company that went from a $0.06 loss to a $0.09 profit did not accelerate. It stopped bleeding.
Sort a screen by the biggest expected change, and that company lands near the top, right next to a real grower. The column cannot tell them apart.
Adam’s system does not sort by change. It grades six factors: momentum, size, volatility, value, quality and growth. Value and Quality measure what the business actually is today.
Momentum measures what buyers are actually doing today. When a stock posts a monster estimate and still grades Bearish, those factors are telling you the hole is real and the company is still standing in it.
Broadcom is the name to watch. It is the biggest company on the list by a mile, a $1.69 trillion business expected to grow earnings by almost 70% from last quarter.
It grades Bearish. And it walks into Wednesday’s report already one of the most beaten-down large caps on Adam’s screen, sitting near oversold after a long slide.
The market is voting before the numbers are even out.
Now, let’s look at potentially bearish earnings next week…
“Bearish” Earnings to Watch
For our “bearish” earnings screen, we’re only looking for two things:
- 10 or more analysts must cover the stock.
- The average analyst estimate for the current quarter’s EPS is less than the previous quarter’s.
We want companies that are covered by a sufficiently large group of Wall Street analysts who collectively expect the company to report a quarter-over-quarter (QOQ) decline in earnings.
Here are two companies that passed this screen:
Only two names screened bearish next week. Both are expected to earn slightly less than they did last quarter. Neither decline is dramatic.
The Campbell’s Co. (CPB) is the one you would expect. A few cents lighter, and Adam’s system grades it Bearish right alongside the estimate. The screen and the rating agree. Nothing to argue about there.
Alimentation Couche-Tard Inc. (ANCTF) is the one that should stop you.
Couche-Tard is expected to earn less next quarter than it earned last quarter. And it is the only stock on my entire earnings board that grades Bullish.
Not the best of the bullish list. The only Bullish rating on either page, and it is sitting on the wrong page.
Why? Couche-Tard sells gas and snacks out of thousands of stores.
Adam’s factors like the business, the balance sheet and the price. Nobody expects fireworks from a convenience store chain, so nobody has bid it up to a silly number. One soft quarter does not change the machine underneath it.
That is what a real setup looks like. Boring, well-priced and completely absent from every “biggest expected earnings increase” list on the internet.
What To Do About It
Do not chase next week’s earnings winners.
The estimate column tells you where the excitement is. The rating column tells you where the money is.
Next week, those two columns point in opposite directions, and after the season we just watched, I will take the rating every time.
Watch Broadcom on Wednesday after the close. If a 70% jump in earnings cannot lift a stock, Adam’s system rates it Bearish; you will watch this thesis prove itself in public.
Have a great weekend.
Until next time…
Safe trading,
Matt Clark, CMSA®
Chief Research Analyst, What My System Says Today
