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.
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.
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.
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.
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.
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 Caterpillar?
The final step today is to look at a stock that meets our ESP qualifications. Caterpillar (CAT – Free Report) earns a #3 (Hold) 21 days from its next quarterly earnings release on April 24, 2025, and its Most Accurate Estimate comes in at $4.46 a share.
CAT has an Earnings ESP figure of +3.21%, which, as explained above, is calculated by taking the percentage difference between the $4.46 Most Accurate Estimate and the Zacks Consensus Estimate of $4.32. Caterpillar 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.
CAT is one of just a large database of Industrial Products stocks with positive ESPs. Another solid-looking stock is Emerson Electric (EMR – Free Report) .
Slated to report earnings on May 14, 2025, Emerson Electric holds a #2 (Buy) ranking on the Zacks Rank, and it’s Most Accurate Estimate is $1.45 a share 41 days from its next quarterly update.
Emerson Electric’s Earnings ESP figure currently stands at +2.28% after taking the percentage difference between its Most Accurate Estimate and its Zacks Consensus Estimate of $1.41.
CAT and EMR’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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