Hedge Funds Are Buying These 4 Stocks With A History Of Earnings Surprises

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 |  Includes: DO, EBIX, FIRE, GNRC
by: Kapitall

Do you like to follow earnings season? Although this earnings season has almost ended, there are still many names that haven't yet reported their results.

To create the list below we started by looking for stocks with a history of surprising the market with positive earnings reports, with an average earnings surprise of at least 5% over the last five quarterly reports.

We continued our analysis by looking at the financial statements of all companies to pick those with encouraging sales trends.

Specifically, we focused on strong sales trends, comparing growth in revenue to growth in accounts receivable. Since accounts receivable is the portion of revenue not yet received, and there is no guarantee the money will ever be received, the smaller the portion of revenue made up of receivables the healthier the company's revenue.

The stocks in our list are seeing faster growth in revenue than accounts receivable year-over-year, as well as accounts receivable comprising a smaller portion of current assets over the same time period.

Finally, we screened for those with bullish sentiment from institutional investors, with significant net institutional purchases over the last quarter representing at least 5% of share float. This indicates that institutional investors such as hedge fund managers and mutual fund managers expect these names to outperform into the future.

A Closer Look

4 Stocks made our list. We looked at Sourcefire (NASDAQ:FIRE) in more detail. The stock is trading around $47.67 versus its 52-week high of $59.64, up 6% in the past 1-year. We also looked at the stock's historical correlation to volatility. Stocks that are highly correlated may have been treated as "safe havens" for uncertain times. Correlation with the VIX index was at 0.554 over the last 60 days.

The company reported record revenue for fourth quarter 2012, and full year 2012 . Revenue for quarter ended March 2013 is expected to be $57.14 million, and earnings per share is expected to be $0.13.

The company maintains a conservative balance sheet with cash and short-term investment of $205 million, and zero public debt.

The List

For an interactive version of this chart, click on the image below. Analyst ratings sourced from Zacks Investment Research.

Do you think these stocks will outperform like hedge funds expect? Use this list as a starting point for your own analysis.

1. Diamond Offshore Drilling Inc. (NYSE:DO): Operates as an offshore oil and gas drilling contractor worldwide.

  • Market cap at $10.02B, most recent closing price at $71.99
  • Net institutional purchases in the current quarter at 4.1M shares, which represents about 5.95% of the company's float of 68.90M shares. The 2 top holders of the stock are Lowes Corporation, and T. Rowe Price.
  • Revenue grew by 0.29% during the most recent quarter ($750.54M vs. $748.36M y/y). Accounts receivable grew by -11.4% during the same time period ($499.66M vs. $563.93M y/y). Receivables, as a percentage of current assets, decreased from 28.3% to 23.43% during the most recent quarter (comparing 3 months ending 2012-12-31 to 3 months ending 2011-12-31).
  • In Mar 2012: Reported EPS at 1.21 vs. estimate at 1 (surprise of 21%). In Jun 2012: Reported EPS at 1.09 vs. estimate at 0.9 (surprise of 21.1%). In Sep 2012: Reported EPS at 1.28 vs. estimate at 1.02 (surprise of 25.5%). In Dec 2012: Reported 1.41 vs. estimate at 1.1 (surprise of 28.2%. [Average earnings surprise at 23.95%].
  • The company is expected to report earnings on April 19th, 2013.

2. Ebix Inc. (NASDAQ:EBIX): Provides on-demand software and e-commerce solutions to the insurance industry.

  • Market cap at $521.92M, most recent closing price at $13.84.
  • Net institutional purchases in the current quarter at 2.2M shares, which represents about 6.31% of the company's float of 34.86M shares. The 2 top holders of the stock are FMR, LLC., and BMO Financial Corp.
  • Revenue grew by 26.29% during the most recent quarter ($53.8M vs. $42.6M y/y). Accounts receivable grew by 19.08% during the same time period ($37.2M vs. $31.24M y/y). Receivables, as a percentage of current assets, decreased from 57.45% to 48.67% during the most recent quarter (comparing 3 months ending 2012-09-30 to 3 months ending 2011-09-30).
  • In Dec 2011: Reported EPS at 0.44 vs. estimate at 0.41 (surprise of 7.3%). In Mar 2012: Reported EPS at 0.4 vs. estimate at 0.39 (surprise of 2.6%). In Jun 2012: Reported EPS at 0.47 vs. estimate at 0.39 (surprise of 20.5%). In Sep 2012: Reported 0.46 vs. estimate at 0.4 (surprise of 15%. [Average earnings surprise at 11.35%].
  • The company is expected to report earnings on March 21st, 2013.

3. Sourcefire, Inc. : Provides intelligent Cybersecurity solutions for information technology; environments of commercial enterprises, such as healthcare, financial services, manufacturing, energy, education, retail, and telecommunications; and federal, state, and international government organizations worldwide.

  • Market cap at $1.27B, most recent closing price at $48.42
  • Net institutional purchases in the current quarter at 2.6M shares, which represents about 8.93% of the company's float of 29.10M shares. The 2 top holders of the stock are FMR, LLC., and T. Rowe Price.
  • Revenue grew by 30.13% during the most recent quarter ($58.83M vs. $45.21M y/y). Accounts receivable grew by 15.58% during the same time period ($58.74M vs. $50.82M y/y). Receivables, as a percentage of current assets, decreased from 25.85% to 24.16% during the most recent quarter (comparing 3 months ending 2012-09-30 to 3 months ending 2011-09-30).
  • In Dec 2011: Reported EPS at 0.25 vs. estimate at 0.19 (surprise of 31.6%). In Mar 2012: Reported EPS at 0.11 vs. estimate at 0.08 (surprise of 37.5%). In Jun 2012: Reported EPS at 0.16 vs. estimate at 0.14 (surprise of 14.3%). In Sep 2012: Reported 0.25 vs. estimate at 0.21 (surprise of 19%. [Average earnings surprise at 25.6%].
  • The company is expected to report earnings on April 30th, 2013.

4. Generac Holdings Inc. (NYSE:GNRC): Manufactures automatic, stationary standby and portable generators.

  • Market cap at $2.33B, most recent closing price at $34.43.
  • Net institutional purchases in the current quarter at 3.4M shares, which represents about 10.6% of the company's float of 32.08M shares. The 2 top holders of the stock are Canada Pension Plan Investment Board, and BAMCO Inc.
  • Revenue grew by 25.6% during the most recent quarter ($300.59M vs. $239.32M y/y). Accounts receivable grew by 9.81% during the same time period ($129.12M vs. $117.59M y/y). Receivables, as a percentage of current assets, decreased from 32.44% to 32.22% during the most recent quarter (comparing 3 months ending 2012-09-30 to 3 months ending 2011-09-30).
  • In Mar 2012: Reported EPS at 0.96 vs. estimate at 0.71 (surprise of 35.2%). In Jun 2012: Reported EPS at 0.58 vs. estimate at 0.55 (surprise of 5.5%). In Sep 2012: Reported EPS at 0.78 vs. estimate at 0.71 (surprise of 9.9%). In Dec 2012: Reported 0.87 vs. estimate at 0.69 (surprise of 26.1%. [Average earnings surprise at 19.18%].
  • The company is expected to report earnings on May 8th, 2013.

*EPS data sourced from Yahoo! Finance, all other data sourced from Finviz.

Disclosure: I have no positions in any stocks mentioned, and no plans to initiate any positions within the next 72 hours.

Business relationship disclosure: Business relationship disclosure: Kapitall is a team of analysts. This article was written by Sabina Bhatia, one of our writers. We did not receive compensation for this article (other than from Seeking Alpha), and we have no business relationship with any company whose stock is mentioned in this article.