QQuarterly financial reports play a vital role on Wall Street, helping investors see how a company has performed and what might happen in the near term. And among all the parameters and results to consider, revenue is one of the most important.
The profit figure itself is key, of course, but a beat or miss on the bottom line can sometimes be just as important, if not more so. Therefore, investors should consider paying close attention to these earnings surprises, as a big beat can help a stock rise and vice versa.
Hunting for “earnings whispers” or companies willing to beat their quarterly earnings estimates is fairly common practice. But that doesn’t make things any easier. One proven way is to use the Zacks Earnings ESP tool.
The ESP of Zacks Earnings, Explained
The Zacks Earnings ESP is more formally known as the Expected Surprise Forecast, and it aims to grab the inside trail on the latest analyst estimate revisions ahead of a company’s report. The idea is relatively intuitive because a new projection could be based on more complete information.
Now that we understand the basic idea, let’s look at how expected surprise prediction works. The ESP is calculated by comparing the most accurate estimate to the Zacks consensus estimate, with the percentage difference between the two giving us the Zacks ESP figure.
When we join a positive earnings ESP with Zacks rank #3 (Hold) or stronger, stocks posted a positive surprise 70% of the time. Moreover, this system has allowed investors to produce around 28% annual returns on average, according to our 10-year backtest.
Most of the stocks, around 60%, fall into category #3 (Hold) and they should behave in line with the broader market. Stocks with a #2 (Buy) and #1 (Strong Buy) rating, or the top 15% and 5% of stocks, respectively, are expected to outperform the market, with Strong Buy stocks outperforming more than any other ranking.
Should you consider Apple?
Now that we understand what ESP is and how beneficial it can be, let’s dive into a stock that currently fits the bill. Apple (AAPL) is earning a #2 (Buy) right now and its most accurate estimate sits at $1.49 per share, just 33 days away from its next earnings release on April 27, 2022.
AAPL has an ESP figure of 3.93%, which as explained above is calculated by taking the percentage difference between the most accurate estimate of $1.49 and Zacks consensus estimate of 1, $43. Apple is one of the only major stock databases with positive ESPs. These stocks can be filtered by ESP, Zacks Rank, % surprise (last quarter) and report date.
Find stocks to buy or sell before they are flagged
Use the Zacks Earnings ESP filter to surface stocks with the highest probability of positive or negative surprises to buy or sell before they are reported for profitable trades during earnings season. Check it out here >>
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