EProfits are arguably the most important figure in a company’s quarterly financial report. Wall Street is clearly dipping in all other metrics and management input, but the EPS figure helps cut through all the noise.
We know that earnings results are critical, but a company’s performance against earnings expectations can be even more important when it comes to stock prices, especially in the short term. This means that investors might want to take advantage of these earnings surprises.
Now that we know how important earnings and surprises are, it’s time to show investors how to take advantage of these events to increase their returns using the Zacks Earnings ESP filter.
ESP Zacks Earnings, Explained
The Zacks Earnings ESP, or Expected Surprise Prediction, aims to find earnings surprises by focusing on the most recent analyst revisions. The rule of thumb is that if an analyst reprices their earnings estimate before the earnings release, it likely means they have new information that could potentially be more accurate.
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.
In fact, when we combine a Zacks Rank #3 (Hold) or better and a positive earnings ESP, stocks produce a positive surprise 70% of the time. Perhaps more importantly, using these metrics produced average annual returns of 28.3%, according to our 10-year backtest.
Stocks with a #3 (Hold) rating, which are most stocks 60% hedged, should move in line with the broader market. But stocks that rank in the #2 (buy) and #1 (strong buy) rankings, or the top 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 a monolithic diet?
The last thing we’ll do today, now that we’ve mastered ESP and its power as a tool, is take a quick look at a qualifying stock. Monolithic Power (MPWR) currently holds second place (buy) and its most accurate estimate stands at $1.92 per share as of zero days until its next earnings release on February 10, 2022.
Taking the percentage difference between the most accurate estimate of $1.92 and the Zacks consensus estimate of $1.87, Monolithic Power has an ESP of 2.83%. Investors should also be aware that the MPWR is just one of the large stock groups with positive ESPs. All of these eligible stocks can be filtered by ESP, Zacks Rank, % surprise (last quarter) and report date.
Don’t forget to visit the ESP Earnings homepage. Here you will find many other profit-related investment strategies to help you build a winning portfolio.
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 >>
7 best stocks for the next 30 days
Just Released: Experts distill 7 elite stocks from the current Zacks No. 1 Ranking 220 Strong Buys list. They consider these tickers “most likely for early price increases.”
Since 1988, the full list has beaten the market more than 2 times with an average gain of +25.4% per year. So be sure to give these handpicked 7 your immediate attention.
Discover them now >>
Click to get this free report
Monolithic Power Systems, Inc. (MPWR): Free Inventory Analysis Report
To read this article on Zacks.com, click here.
The views and opinions expressed herein are the views and opinions of the author and do not necessarily reflect those of Nasdaq, Inc.