Quarterly financial reports play a vital role on Wall Street, as they help investors see how a company has performed and what might be coming down the road in the near-term. And out of all of the metrics and results to consider, earnings is one of the most important.
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.
Now that we know how important earnings and earnings surprises are, it’s time to show investors how to take advantage of these events to boost their returns by utilizing the Zacks Earnings ESP filter.
The Zacks Earnings ESP, Explained
The Zacks Expected Surprise Prediction, or ESP, works by locking in on the most up-to-date analyst earnings revisions because they can be more accurate than estimates from weeks or even months before the actual release date. The thinking is pretty straightforward: analysts who provide earnings estimates closer to the report are likely to have more information.
The core of the ESP model is comparing the Most Accurate Estimate to the Zacks Consensus Estimate, where the resulting percentage difference between the two equals the Expected Surprise Prediction. The Zacks Rank is also factored into the ESP metric to better help find companies that appear poised to top their next bottom-line consensus estimate, which will hopefully help lift the stock 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 most importantly, using these parameters has helped produce 28.3% annual returns on average, according to our 10 year backtest.
Most stocks, about 60%, fall into the #3 (Hold) category, and they are expected to perform in-line with the broader market. Stocks with a #2 (Buy) and #1 (Strong Buy) rating, or the top 15% and top 5% of stocks, respectively, should outperform the market, with Strong Buy stocks outperforming more than any other rank.
Should You Consider Skechers?
The final step today is to look at a stock that meets our ESP qualifications. Skechers (SKX – Free Report) earns a #2 (Buy) 27 days from its next quarterly earnings release on February 6, 2025, and its Most Accurate Estimate comes in at $0.74 a share.
By taking the percentage difference between the $0.74 Most Accurate Estimate and the $0.73 Zacks Consensus Estimate, Skechers has an Earnings ESP of +0.89%. Investors should also know that SKX is one of a large group of stocks with positive ESPs. Make sure to utilize our Earnings ESP Filter to uncover the best stocks to buy or sell before they’ve reported.
SKX is just one of a large group of Consumer Discretionary stocks with a positive ESP figure. Roku (ROKU – Free Report) is another qualifying stock you may want to consider.
Slated to report earnings on February 20, 2025, Roku holds a #1 (Strong Buy) ranking on the Zacks Rank, and it’s Most Accurate Estimate is -$0.43 a share 41 days from its next quarterly update.
The Zacks Consensus Estimate for Roku is -$0.44, and when you take the percentage difference between that number and its Most Accurate Estimate, you get the Earnings ESP figure of +1.53%.
Because both stocks hold a positive Earnings ESP, SKX and ROKU 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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