Earnings are perhaps the most important number in a company’s quarterly financial report. Wall Street is clearly diving into all the other metrics and information from management, but the EPS number helps cut through all the noise.
The win figure itself is key, of course, but a win 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 the stock move higher and vice versa.
The ability to identify stocks that are likely to beat earnings expectations for the quarter can be profitable, but it is not an easy task. Here at Zacks, our ESP Earnings Filter helps make things easier.
Zacks Earnings ESP Explained
Zacks’ ESP, or Expected Surprise Forecast, aims to detect earnings surprises by focusing on the latest analyst revisions. The basic premise is that if an analyst re-estimates his earnings forecast before the earnings release, that means he probably has new information that could potentially be more accurate.
Now that we understand the basic idea, let’s look at how the expected surprise forecast works. 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.
In fact, when we combined a Zacks Rank #3 (Hold) or better and a positive earnings ESP, the stock produced a positive surprise 70% of the time. Perhaps most importantly, using these parameters helped produce an average 28.3% annualized return, according to our 10-year benchmark.
Stocks ranked #3 (Hold), or 60% of all stocks covered by Zacks Rank, are expected to perform in line with the broader market. Stocks ranked #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 any other rank.
Should you consider ASML?
The last thing we’re going to do today, now that we have an idea of ESP and how powerful a tool it can be, is take a quick look at qualifying stocks. ASML (ASML – Free Report) holds #2 (buy) right now and its best estimate is $5.26 per share 30 days after the upcoming earnings release on January 24, 2024.
ASML’s Earnings ESP is +3.46%, which, as explained above, is calculated by taking the percentage difference between the most accurate estimate of $5.26 and the Zacks Consensus Estimate of $5.08. ASML is also part of a large group of stocks that boast a positive ESP. Make sure you use our ESP Earnings Filter to find the best stocks to buy or sell before they are reported.
ASML is part of a large group of computer and technology company stocks that boast a positive ESP and investors may want to take a look Qualcomm (QCOM – Free Report) as well.
Qualcomm is a Zacks Rank #3 (Hold) stock and is set to report earnings on February 1, 2024. QCOM’s best estimate is $2.51 per share 38 days after the next earnings release.
For Qualcomm, the percentage difference between its best estimate and the Zacks consensus estimate of $2.35 is +6.63%.
ASML and QCOM’s positive ESP numbers tell us that both stocks have a good chance of beating analysts’ expectations in their next earnings report.
Find stocks to buy or sell before they are listed
Use the Zacks Earnings ESP filter to find stocks most likely to be positive or negative surprises to buy or sell before they are reported for a profitable seasonal trade. Check it out here >>
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