Earnings Report Card for Small-Caps

On Friday, we took an updated look at the earnings report card for the large-cap stocks in the S&P 500. We are nearing the end of earnings season, and large-cap reporting is looking OK. There were definitely more upsides than downsides, and the magnitude of upsides were larger than the size of downsides. Although this can be a function of downside surprises being pre-announced, while upsides are reported later, nonetheless the trend was surprisingly positive.

Now we turn our attention to small-caps. Two weeks ago, I compiled a mid-season report card for the Russell 2000, in order to discern if the underperformance of small-caps relative to large-caps this year is due to different earnings performance. Our findings at that time were that its upside earnings surprises and magnitude were better than the S&P 500's. However, the downsides were also worse! This is not unexpected, since the small-caps are more volatile than the large-caps. But we had not yet seen any earnings-based evidence that favored large cap over small.

How is the Russell 2000 looking now? 

At this point, 73% of the Russell 2000 has reported and the table below highlights the winners and losers. Keep in mind that I favor earnings surprises over absolute numbers or even growth rates. To make money in stocks, you need a variant view relative to the market as a whole. You are not going to get paid to just run with the herd. I find surprises to be the best tell for where expectations are wrong. (This analysis uses the earnings-per-share (EPS) estimate as of six weeks ago, in order to screen out recent changes, pre-announcements and other manipulations.)

This table shows the top twenty and bottom twenty surprises, by percentage, of the more than 1,453 reports so far for the R2000 names. I used just the 20 outliers to keep the size of the table manageable; email me here if you want the full list.

Russell 2000 Second-Quarter Earnings

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This far into reporting season, the trend in surprises is pretty stable. Of the names that have reported, 31% had upsides of better than 20%, which is identical to our last report card. Only 12% had downside surprises that were greater than 20%, which is essentially equal to the calculation we made last week.

The magnitude of surprises is also favorable. The average upside surprise has been 85%, although that calculation is skewed by a dozen very large upsides (on a percentage basis). Removing the outliers with four-digit upside surprise percentages yields an average upside surprise of 53%, which is still very respectable. The average downside was negative 45%, which is bit worse than the negative 40% that we tallied last week.

The new big winners skew toward the transports. FreightCar America (RAIL) knocked it out of the park, posting $0.44 vs. consensus of a penny. Teekay Tankers (TNK) put up $0.05 of EPS vs. break-even, which was also a meaningful surprise. Away from the outliers, Erickson (EAC) -- the aircrane, not the mobile phone company -- put up $1.10 vs. expectations of $0.12.

On the downside, college book rental name Chegg (CHGG) is not chugging along. It posted a huge miss: a loss of $0.30 vs. expectations of near break-even. OncoMed Pharma (OMED) also did an OMG!, printing a loss of $0.22 when earnings of $0.03 were expected.

Russell 2000 Second-Quarter Earnings

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At the time of publication, Dvorchack had no positions in the stocks mentioned.