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 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.
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.
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.
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 Johnson & Johnson?
Now that we understand what the ESP is and how beneficial it can be, let’s dive into a stock that currently fits the bill. Johnson & Johnson (JNJ – Free Report) earns a #2 (Buy) right now and its Most Accurate Estimate sits at $2.03 a share, just 13 days from its upcoming earnings release on January 22, 2025.
Johnson & Johnson’s Earnings ESP sits at +1.75%, which, as explained above, is calculated by taking the percentage difference between the $2.03 Most Accurate Estimate and the Zacks Consensus Estimate of $2. JNJ 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.
JNJ is one of just a large database of Medical stocks with positive ESPs. Another solid-looking stock is Tenet Healthcare (THC – Free Report) .
Tenet Healthcare, which is readying to report earnings on February 13, 2025, sits at a Zacks Rank #3 (Hold) right now. It’s Most Accurate Estimate is currently $2.93 a share, and THC is 35 days out from its next earnings report.
The Zacks Consensus Estimate for Tenet Healthcare is $2.93, and when you take the percentage difference between that number and its Most Accurate Estimate, you get the Earnings ESP figure of +0.1%.
JNJ and THC’s positive ESP figures tell us that both stocks have a good chance at beating analyst expectations in their next earnings report.
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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