Two factors often determine stock prices over the long term: earnings and interest rates. Investors can’t control the latter, but they can focus on the company’s earnings results each quarter.
We know that earnings results are vital, but how a company performs compared to bottom line expectations can be even more important when it comes to share prices, especially in the short term. That means investors may want to take advantage of these 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 increase their returns using the Zacks Earnings ESP filter.
Zacks Earnings ESP Explained
The Zacks Earnings ESP is more formally known as the Expected Surprise Estimate and aims to capture the inside track on the latest revisions to analysts’ estimates ahead of a company’s report. The idea is relatively intuitive, as a newer projection can be based on more complete 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 estimate. The Zacks Rank is also included in the ESP metric to better help find companies that look poised to beat their next consensus estimate, which will hopefully help drive the share price higher.
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), 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) rankings, 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 a Super Micro PC?
The final step today is to look at a stock that meets our ESP qualifications. Super Micro Computer (SMCI – Free Report) earns #2 (Buy) one day from its next quarterly earnings release on January 31, 2023, and its best estimate is $3.15 per share.
Super Micro Computer ESP’s Earnings is +6.78%, which, as explained above, is calculated by taking the percentage difference between the most accurate estimate of $3.15 and the Zacks Consensus Estimate of $2.95. SMCI 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.
SMCI 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 BlackBerry (BB – Free Report) as well.
BlackBerry, which is set to report earnings on March 30, 2023, currently has a Zacks Rank #2 (Buy). The best estimate is currently -$0.06 per share, and BB has 59 days until its next earnings report.
BlackBerry ESP’s earnings currently stand at +7.69% after taking the percentage difference between its best estimate and its Zacks Consensus Estimate of -$0.07.
With both stocks holding positive earnings ESP, SMCI and BB could potentially post earnings in their next reports.
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 >>