Second-quarter earnings season was a bit of a bust. Although earnings remain at an all-time high, the pace of earnings growth continues to look weak. Earnings growth is up just 3% from last year, a small improvement from the first quarter’s 2.6% gain and the 2.8% average for the past four quarters.
The headlines reflected that disappointment, with stories about the biggest blue chips struggling with the weak global economy and falling short of expectations. That includes misses from bellwethers like International Business Machines Corp. (NYSE:IBM), Google Inc (NASDAQ:GOOG) and Microsoft Corporation (NASDAQ:MSFT).
But in spite of some earnings headwinds, there were a number of companies that bucked the trend and delivered big earnings surprises. For instance, take Facebook Inc (NASDAQ:FB), which delivered a 44% earnings surprise last month that sent the company’s share price soaring.
But if you missed out on that first leg higher, don’t worry, because according to a little-known and understood pattern, there is still more upside in Facebook Inc (NASDAQ:FB).
According to the post-earnings drift, firms with good quarterly earnings reports tend to see returns drift upward for at least 60 days after their announcements. Similarly, firms that report disappointing earnings tend to drift lower for a similar period.
You can see that pattern play out in Facebook Inc (NASDAQ:FB), with shares initially jumping to $34 before drifting another 20% higher in the next three weeks.
A strong earnings surprise will have an immediate impact on a company’s share price as short-term players scramble to be the first to market. But that is merely the first wave in a series of bigger waves, as larger long-term investors like hedge and mutual funds shift money into new targets based on new information. That can keep billions in capital flowing into a stock for weeks and months after an earnings surprise.
The post-earnings drift enables investors to bypass the guesswork of identifying which companies will produce earnings surprises and focus on simply buying ones that have already surprised to the upside instead. That means missing the first, big move higher, but it also increases the likelihood of a profitable investment or trade.
Below is a list of seven S&P 500 companies that delivered big second-quarter earnings surprises.