Quarterly financial reports play a vital role on Wall Street because they help investors see how a business has performed and what could happen in the near term. And of all the metrics and outcomes to consider, revenue is one of the most important.
Both life and the stock market are about expectations, and going beyond what is expected often pays off, while falling short can have negative consequences. Investors may want to try for higher returns by finding positive earnings surprises.
The ability to identify stocks that are likely to exceed quarterly earnings expectations can pay off, but it’s not a simple task. At Zacks, our ESP Filter for Income makes it easier.
Zacks Earnings ESP Explained
The Zacks Earnings ESP is more officially known as the Expected Surprise Forecast, and it aims to grab the inside track on the latest revisions to analysts’ estimates ahead of a company’s report. The idea is relatively intuitive because a more recent projection could be based on more complete information.
The heart of the ESP model is comparing the most accurate estimate to the Zacks consensus estimate, where the resulting percentage difference between the two is equal to the expected surprise forecast. The Zacks Rank is also factored into the ESP metric to better help find companies that appear to be on the verge of beating their next consensus estimate, which will hopefully help raise the share price.
In fact, when we combined a Zacks Rank # 3 (Hold) or better and a positive earnings ESP, stocks produced a positive surprise 70% of the time. Perhaps more importantly, using these metrics helped produce annual returns of 28.3% on average, according to our 10-year backtest.
Stocks ranked # 3 (Hold), or 60% of all stocks covered by the Zacks ranking, are expected to move in line with the market as a whole. Stocks ranked # 2 (buy) and # 1 (strong buy), or the richest 15% and 5% of stocks, respectively, are expected to outperform the market; Strong Buy stocks are expected to outperform more than any other ranking.
Should you consider Best Buy?
The last thing we’re going to do today, now that we have an understanding of ESP and how powerful a tool it can be, is to take a quick look at an eligible stock. Best Buy (BBY) currently holds a # 3 (hold) and its most accurate estimate stands at $ 1.48 per share on a day of its next earnings release on May 27, 2021.
BBY has an ESP figure of 4.93%, which as explained above is calculated by taking the percentage difference between the most accurate estimate of $ 1.48 and the Zacks consensus estimate of 1.41 $. Best Buy is one of the only major stock databases with positive ESPs. These actions can be filtered by ESP, Zacks ranking,% surprise (last quarter) and reporting date.
Using the Zacks Earnings ESP to your advantage is just the start. Be sure to check out the ESP Income Home page for even more income tips and tricks on how to design a winning investment portfolio.
Look for stocks to buy or sell before they are reported
Use Zacks Earnings’ ESP Filter to increase stocks with the highest probability of positively or negatively surprising to buy or sell before they are declared for profitable trading in the earnings season. Find out here >>
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