Earnings are arguably the most important single number on a company’s quarterly financial report. Wall Street clearly dives into all of the other metrics and management’s input, but the EPS figure helps cut through all the noise.
The earnings figure itself is key, of course, but a beat or miss on the bottom line can sometimes be just as, if not more, important. Therefore, investors should consider paying close attention to these earnings surprises, as a big beat can help a stock climb and vice versa.
Hunting for ‘earnings whispers’ or companies poised to beat their quarterly earnings estimates is a somewhat common practice. But that doesn’t make it easy. One way that has been proven to work is by using the Zacks Earnings ESP tool.
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.
Now that we understand the basic idea, let’s look at how the 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 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 Wells Fargo?
The final step today is to look at a stock that meets our ESP qualifications. Wells Fargo (WFC – Free Report) earns a #2 (Buy) 14 days from its next quarterly earnings release on January 10, 2025, and its Most Accurate Estimate comes in at $1.39 a share.
By taking the percentage difference between the $1.39 Most Accurate Estimate and the $1.33 Zacks Consensus Estimate, Wells Fargo has an Earnings ESP of +4.23%. Investors should also know that WFC 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.
WFC is one of just a large database of Finance stocks with positive ESPs. Another solid-looking stock is Reinsurance Group (RGA – Free Report) .
Slated to report earnings on February 6, 2025, Reinsurance Group holds a #3 (Hold) ranking on the Zacks Rank, and it’s Most Accurate Estimate is $5.44 a share 41 days from its next quarterly update.
The Zacks Consensus Estimate for Reinsurance Group is $5.19, and when you take the percentage difference between that number and its Most Accurate Estimate, you get the Earnings ESP figure of +4.69%.
WFC and RGA’s positive ESP metrics may signal that a positive earnings surprise for both stocks is on the horizon.
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 >>
Financial Market Newsflash
No financial news published today. Check back later.
