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.
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.
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.
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 Canadian Natural Resources?
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. Canadian Natural Resources (CNQ) holds a #3 (Hold) at the moment and its Most Accurate Estimate comes in at $2.10 a share six days away from its upcoming earnings release on November 3, 2022.
CNQ has an Earnings ESP figure of +0.48%, which, as explained above, is calculated by taking the percentage difference between the $2.10 Most Accurate Estimate and the Zacks Consensus Estimate of $2.09. Canadian Natural Resources 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.
CNQ is just one of a large group of Oils and Energy stocks with a positive ESP figure. Sunoco LP (SUN) is another qualifying stock you may want to consider.
Slated to report earnings on November 1, 2022, Sunoco LP holds a #2 (Buy) ranking on the Zacks Rank, and it’s Most Accurate Estimate is $1.18 a share four days from its next quarterly update.
For Sunoco LP, the percentage difference between its Most Accurate Estimate and its Zacks Consensus Estimate of $1.14 is +3.51%.
Because both stocks hold a positive Earnings ESP, CNQ and SUN could potentially post earnings beats in their next reports.
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 >>