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.
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.
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.
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 #3 (Hold) ranking, which is most stocks covered at 60%, are expected to perform in-line with the broader market. But stocks that fall into the #2 (Buy) and #1 (Strong Buy) ranking, 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 Sprouts Farmers?
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. Sprouts Farmers (SFM – Free Report) holds a #2 (Buy) at the moment and its Most Accurate Estimate comes in at $0.79 a share three days away from its upcoming earnings release on February 20, 2025.
By taking the percentage difference between the $0.79 Most Accurate Estimate and the $0.72 Zacks Consensus Estimate, Sprouts Farmers has an Earnings ESP of +9.58%. Investors should also know that SFM 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.
SFM is just one of a large group of Retail and Wholesale stocks with a positive ESP figure. Home Depot (HD – Free Report) is another qualifying stock you may want to consider.
Home Depot is a Zacks Rank #3 (Hold) stock, and is getting ready to report earnings on February 25, 2025. HD’s Most Accurate Estimate sits at $3.21 a share eight days from its next earnings release.
Home Depot’s Earnings ESP figure currently stands at +4.33% after taking the percentage difference between its Most Accurate Estimate and its Zacks Consensus Estimate of $3.08.
SFM and HD’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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