Two factors often determine stock prices in the long run: earnings and interest rates. Investors can’t control the latter, but they can focus on a company’s earnings results every quarter.
The earnings figure itself is key, of course, but a beat 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 a stock climb and vice versa.
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 Earnings ESP, or Expected Surprise Prediction, aims to find earnings surprises by focusing on the most recent analyst revisions. The basic premise is that if an analyst reevaluates their earnings estimate ahead of an earnings release, it means they likely have new information that could possibly 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 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.
In fact, when we combined a Zacks Rank #3 (Hold) or better and a positive Earnings ESP, stocks produced a positive surprise 70% of the time. Perhaps most importantly, using these parameters has helped produce 28.3% annual returns on average, according to our 10 year backtest.
Stocks with a #3 (Hold) ranking, 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) ranking, or the top 15% and top 5% of stocks, respectively, should outperform the market. Strong Buy stocks should outperform more than any other rank.
Should You Consider Chegg?
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. Chegg (CHGG) holds a #3 (Hold) at the moment and its Most Accurate Estimate comes in at $0.27 a share 27 days away from its upcoming earnings release on October 25, 2021.
CHGG has an Earnings ESP figure of 37.29%, which, as explained above, is calculated by taking the percentage difference between the $0.27 Most Accurate Estimate and the Zacks Consensus Estimate of $0.20. Chegg is one of just a large database of stocks with positive ESPs. These stocks can be filtered by ESP, Zacks Rank, % Surprise (Last Qtr.), and Reporting date.
Now that you know how to use the Zacks Earnings ESP to your advantage, make sure to check out the Earnings ESP Home Page for even more earnings related strategies to create a winning portfolio.
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 >>