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
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.
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 indicator to better help find companies that look poised to exceed 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.
Most stocks, around 60%, fall into category #3 (hold) and are expected to perform in line with the broader market. Stocks rated #2 (Buy) and #1 (Strong Buy), or the top 15% and top 5% of stocks, respectively, should outperform the market, with Strong Buy stocks outperforming any other rank.
Should you consider Synopsys?
The final step today is to look at a stock that meets our ESP qualifications. Synopsis (SNPS) earns #2 (Buy) nine days from the next quarterly earnings release on November 29, 2023, and its best estimate is $3.07 per share.
Synopsys EPS is +0.94% which, as explained above, is calculated by taking the percentage difference between the most accurate estimate of $3.07 and the Zacks Consensus Estimate of $3.04. SNPS 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.
SNPS is one of the large databases of computer and technology company stocks with positive ESPs. Another solid looking stock is Applied Materials (AMAT).
Slated to report earnings on February 15, 2024, Applied Materials holds a Zacks Rank #3 (Hold) and the most accurate estimate is $1.89 per share 87 days after the next quarterly update.
The Zacks Consensus Estimate for Applied Materials is $1.87, and when you take the percentage difference between that number and its most accurate estimate, you get an EPS of +0.97%.
Positive ESP readings on SNPS and AMAT may signal that a positive earnings surprise is on the horizon for both stocks.
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 >>
Zacks Names ‘Top Pick for Double’
Out of thousands of stocks, each of 5 Zacks experts picked their favorite to skyrocket +100% or more in the coming months. Of these 5, Director of Research Sheraz Mian handpicks one that has the most explosive upside of all.
He has been credited with a “landmark medical breakthrough” and is developing a vibrant array of other projects that could change the world for patients suffering from diseases involving the liver, lungs and blood. This is a timely investment that you can catch as it comes out of the bottom of a bear market.
It could rival or outperform other recent stocks slated to double, such as Boston Beer Company, which shot up +143.0% in just over 9 months, and NVIDIA, which boomed +175.9% in one year.
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Synopsys, Inc. (SNPS): Free Stock Analysis Report
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The views and opinions expressed herein are those of the author and do not necessarily reflect those of Nasdaq, Inc.