3 Best Earnings ESP Stocks For Q3 Earnings Season

Includes: FDO, LNN, MON
by: Zacks Investment Research

Q3 earnings season has begun and though it won't officially kick off until next week with the results of Alcoa (NYSE:AA), we are already live and trading candidates.

We are expecting further deterioration in top line (revenue growth) amidst margins that are already quite generous. But even though analysts are expecting the weakest quarterly earnings growth since 2009 (-3.4% earnings growth), it might actually bode well for stock prices. Low expectations may leave more room for positive surprise and upside rallies in stocks that still remain relatively inexpensive from a price to earnings perspective.

We have a total of 16 companies reporting results this week, including five S&P 500 companies. Expectations for the third quarter remain quite low, with total earnings expected to drop 3% from the same period last year. This growth expectation reflects a 2.4% drop in total revenues and a 10-basis point expansion in net margins.

About Zacks Earnings ESP

Earnings ESP is our methodology for determining which stocks have the best chance to surprise with their next earnings announcement. The Earnings ESP shows the percentage difference between the Most Accurate Estimate and the Consensus. The Zacks ESP helps predict earnings surprises to the upside and downside; the greater the ESP (positive or negative) the greater the likelihood for a surprise. I use ESP to help quantify the conviction of the analysts for a surprise and stack the odds in my favor when I combine it with other measurements and statistics. This can work for bullish potential surprises (positive ESP) as well as bearish surprises (negative ESP).

Bullish ESP Stocks

Family Dollar (NYSE:FDO) is a Zacks Rank 3 stock with a positive earnings ESP of 3% for the current quarter; the Zacks Consensus is for a profit of 75 cents in Q3. Recent data show consumers still being frugal with their money, but stable; companies like Family Dollar and its low cost options (merchandise at prices from under $1 to $10) remain successful in luring budget-constrained consumers amidst the fragile economic recovery.

Shares have been building strength, but remain far below the past year's high of almost $75.

- Family Dollar report earnings on October 3rd.

Monsanto (NYSE:MON) is a Zacks Rank 2 stock with a positive earnings ESP of 5.75% for the current quarter; the Zacks Consensus is for a loss of 44 cents.

While this quarter may register a loss for the company, analysts are expecting strength in the quarter and solid 2012 earnings of $3.72. Revenue should be driven by the drought in the U.S. and poor crop yields overseas. Farmers will need high quality seed and fertilizers to get their yields up to par. Monsanto has reported strong earnings lately, beating estimates 4 out of the last 5 quarters.

- Monsanto report earnings on October 3rd.

Lindsay Corp (NYSE:LNN) is a Zacks Rank 2 stock with a positive earnings ESP of 3% for the current quarter. The Zacks consensus estimate is for Q3 EPS of $0.75, with the most accurate estimate at $0.77. Lindsay manufactures and markets irrigation equipment used by farmers to increase or stabilize crop production while conserving water, energy, and labor.

Lindsay also owns Barrier Systems Inc for movable barriers/medians you'd see on a highway reducing traffic congestion among other roadway equipment. They also are a contract manufacturer for parts or complete goods for such firms as John Deere, General Electric and Case New Holland.

With the ongoing drought, chances are that Lindsay's products are in high demand.

- Lindsay Corp reports earnings on October 11th.