Two factors often determine stock prices in the long run: earnings and interest rates. Investors can’t control the latter, but they can focus on a company’s earnings results every quarter.
We know earnings results are vital, but how a company performs compared to bottom line expectations can be even more important when it comes to stock prices, especially in the near-term. This means that investors might want to take advantage of these earnings surprises.
The ability to identify stocks that are likely to top quarterly earnings expectations can be profitable, but it’s no simple task. Here at Zacks, our Earnings ESP filter helps make things easier.
The Zacks Earnings ESP, Explained
The Zacks Earnings ESP, or Expected Surprise Prediction, aims to find earnings surprises by focusing on the most recent analyst revisions. The basic premise is that if an analyst reevaluates their earnings estimate ahead of an earnings release, it means they likely have new information that could possibly be more accurate.
With this in mind, the Expected Surprise Prediction compares the Most Accurate Estimate (being the most recent) against the overall Zacks Consensus Estimate. The percentage difference provides the ESP figure. The system also utilizes our core Zacks Rank to provide a stronger system for identifying stocks that might beat their next quarterly earnings estimate and possibly see the stock price climb.
When we join a positive earnings ESP with a Zacks Rank #3 (Hold) or stronger, stocks posted a positive bottom-line surprise 70% of the time. Plus, this system saw investors produce roughly 28% annual returns on average, according to our 10 year backtest.
Stocks with a ranking of #3 (Hold), or 60% of all stocks covered by the Zacks Rank, are expected to perform in-line with the broader market. Stocks with rankings of #2 (Buy) and #1 (Strong Buy), or the top 15% and top 5% of stocks, respectively, should outperform the market; Strong Buy stocks should outperform more than any other rank.
Should You Consider Trane Technologies?
The last thing we will do today, now that we have a grasp on the ESP and how powerful of a tool it can be, is to quickly look at a qualifying stock. Trane Technologies (TT – Free Report) holds a #3 (Hold) at the moment and its Most Accurate Estimate comes in at $2.22 a share 19 days away from its upcoming earnings release on April 30, 2025.
Trane Technologies’ Earnings ESP sits at +1.25%, which, as explained above, is calculated by taking the percentage difference between the $2.22 Most Accurate Estimate and the Zacks Consensus Estimate of $2.19. TT is also part of a large group of stocks that boast a positive ESP. Make sure to utilize our Earnings ESP Filter to uncover the best stocks to buy or sell before they’ve reported.
TT is part of a big group of Construction stocks that boast a positive ESP, and investors may want to take a look at Johnson Controls (JCI – Free Report) as well.
Slated to report earnings on May 7, 2025, Johnson Controls holds a #3 (Hold) ranking on the Zacks Rank, and it’s Most Accurate Estimate is $0.80 a share 26 days from its next quarterly update.
The Zacks Consensus Estimate for Johnson Controls is $0.77, and when you take the percentage difference between that number and its Most Accurate Estimate, you get the Earnings ESP figure of +3.91%.
Because both stocks hold a positive Earnings ESP, TT and JCI could potentially post earnings beats in their next reports.
Find Stocks to Buy or Sell Before They’re Reported
Use the Zacks Earnings ESP Filter to turn up stocks with the highest probability of positively, or negatively, surprising to buy or sell before they’re reported for profitable earnings season trading. Check it out here >>
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