There are few things that can light a fire under a stock like an earnings surprise. When a company chimes in with a big earnings surprise, analysts and portfolio managers update their models, forecasts are increased and shares usually take a big jump higher. Being on the right side of an earnings surprise is a great way to pick up market-beating gains in a very short amount of time.

#-ad_banner-#But if finding those stocks was easy, then everyone would be doing it. But it’s not. That is why I’m going to share a secret formula to help you find stocks that are ready for a big earnings surprise.

A lot of investors will look for companies with strong histories of earnings surprises as an indicator for a future earnings surprise. Although there is a positive correlation between past and future surprises, the problem with this methodology is that it focuses on what has already happened as opposed to what is going to happen. 

That’s a lot like driving a car while looking through the rear-view mirror.

The key to identifying an earnings surprise lays in looking forward and in fluctuations in earnings estimates. The estimates game is all about being conservative. Analysts have very little incentive to be overly bullish. This enables companies to beat the Street, get their investors fired up and give shares a little pop. 

All of that is good for the Wall Street model.

So when an analyst raises earnings projections directly ahead of an earnings report, it is a very bullish signal to the market that the number is about to come in strong. Based upon channel checking, market and company-specific research, the analyst is usually confident that the company is about to report earnings that will exceed expectations.

If that sounds incredibly obvious, then here is why it isn’t… 

Most investors watch the consensus estimate, which is an average of many estimates. So while an analyst raising earnings projections by 10% two weeks ahead of an earnings report is a very bullish signal, it gets buried as just one number in an average of many that has very little effect on the consensus estimate. 

This creates a big opportunity for investors following movement in individual estimates.

Using this methodology, I have identified three stocks that have seen bullish movement in individual estimates directly ahead of earnings season.

1. Meritage Homes (NYSE: MTH) 

This is a residential home builder with a market cap of $1.4 billion. With all the volatility in the housing market in the last few years, it has been difficult for analysts to model earnings for the sector. And that creates opportunity. 

Analysts are currently calling for earnings of six cents per share in the company’s second-quarter results set for July 26. But one bullish analyst recently increased his earnings call by four cents to a total of nine cents per share. Another analyst recently raised his estimate to thirteen cents. But in spite of that bullish tone, with a total of eight covering analysts, those fluctuations are muted through the averages of the consensus estimate.

2. US Airways Group Inc. (NYSE: LCC) 

This passenger and cargo airline company has a market cap of $2.8 billion. Just a few days ago, one bullish analyst tacked on 55 cents to his earnings call, revising his estimate to $1.65. But with 11 analysts covering the stock, the consensus estimate only increased by five cents to $1.50 — still well below the bullish individual estimate. Another analyst added 22 cents to his estimate only six days ago, pushing it to an even more bullish $1.80. Clearly, the analysts are seeing something that tells them the company’s earnings call on July 19 will be stronger than originally expected.

3. Questcor Pharmaceuticals Inc. (Nasdaq: QCOR) 

This is a biopharmaceutical company with a market cap of $2.7 billion. Right now, analysts are looking for earnings of 60 cents per share for the company’s second-quarter results on July 24. But less than a week ago, one analyst made a bold call and raised his estimate to 68 cents. But with five covering analysts on Questcor, that bullish call was masked in the consensus, which only jumped five cents from its previous estimate of 55 cents.

Risks to Consider: Earnings events, whether positive or negative, tend to trigger higher amounts of volatility. Buying a stock ahead of an earnings report should only represent a very small satellite strategy even for higher-risk, growth oriented investors.

Action to Take –> Earnings estimates data is now more widespread and accessible to regular investors than ever before. Individual estimates are widely available through most fundamental research platforms. Creating a screening strategy based on individual fluctuations in earnings estimates is a great way to find those rare stocks that are on the cusp of reporting a big earnings surprise to pump up your gains and give your portfolio a nice boost. These three stocks could pan out nicely for investors who decide to follow this strategy.