Wall Street watches a company’s quarterly report closely to understand as much as possible about its recent performance and what to expect going forward. Of course, one figure often stands out among the rest: earnings.
Life and the stock market are both about expectations, and rising above what is expected is often rewarded, while falling short can come with negative consequences. Investors might want to try to capture stronger returns by finding positive 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.
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 Urban Outfitters?
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. Urban Outfitters (URBN – Free Report) earns a #2 (Buy) right now and its Most Accurate Estimate sits at $0.92 a share, just 14 days from its upcoming earnings release on February 26, 2025.
URBN has an Earnings ESP figure of +2.99%, which, as explained above, is calculated by taking the percentage difference between the $0.92 Most Accurate Estimate and the Zacks Consensus Estimate of $0.89. Urban Outfitters is one of a large database 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.
URBN is one of just a large database of Retail and Wholesale stocks with positive ESPs. Another solid-looking stock is Walmart (WMT – Free Report) .
Walmart, which is readying to report earnings on February 20, 2025, sits at a Zacks Rank #2 (Buy) right now. It’s Most Accurate Estimate is currently $0.64 a share, and WMT is eight days out from its next earnings report.
The Zacks Consensus Estimate for Walmart is $0.64, and when you take the percentage difference between that number and its Most Accurate Estimate, you get the Earnings ESP figure of +0.15%.
URBN and WMT’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 >>
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