Finding stocks that are likely to beat their quarterly
earnings estimates -- and soar -- is an extremely difficult task.
There are plenty of times when a stock beats its estimate but
fails to rise -- or worse -- once earnings are released.
A popular technique that many try to avoid this scenario is by
hunting for 'earnings whispers.' This process looks to get the
inside scoop on analyst estimate revisions ahead of the report in
order to detect those that are most likely to unexpectedly beat
or miss their earnings consensus.
After all, wouldn't it be great to know which stocks are likely
to have earnings surprises ahead of the release date?
And also which stocks are likely to disappoint before their share
We have cracked the code with our new Zacks Earnings ESP system,
as it predicts earnings surprises with nearly 7 out of 10
accuracy while offering up a market-crushing 28% per-year return.
Read on to learn more about this groundbreaking method and how it
could help you both this earnings season, and for years to come.
Zacks Earnings ESP in Focus
This Zacks Earnings ESP (Expected Surprise Prediction) is our
proprietary methodology for determining which stocks have the
best chance to surprise with their next earnings announcement.
The approach takes into account two important parts of the
earnings estimate picture; the 'Most Accurate Estimate' and the
'Zacks Consensus Estimate.'
Once we have these two figures, we compare the Most Accurate
Estimate to the current Zacks Consensus Estimate, and the
resulting percentage difference between the two equals the
Expected Surprise Prediction.
How Accurate is Earnings ESP?
Earnings ESP has proven to be a very valuable tool for investors
seeking stocks that are most likely to beat earnings estimates.
In our extensive backtesting, we found that over the past decade,
stocks with a positive Earnings ESP and with a Zacks Rank of #1,
2 or 3 ('Strong Buy,' 'Buy' or 'Hold'), produced a
positive surprise 70% of the time
In fact, stocks ranked #3 or better with a positive Earnings ESP
only surprised to the downside 21% of the time. This means that
in nearly four out of five cases, Zacks Rank # 1, 2, or 3 stocks
with positive Earnings ESP met or beat estimates, at least in the
ten-year period studied.
Investors should also note that the Earnings ESP strategy must be
used in conjunction with the Zacks Rank for truly favorable
performance figures. For example, our research has shown that
even if you have a favorable Earnings ESP but an unfavorable
Zacks Rank, the chance of a positive surprise is slashed and the
likelihood of a negative surprise increases drastically.
Meanwhile, if the Earnings ESP number is negative but if there is
a neutral to positive Zacks Rank for the stock, obtaining a
positive surprise is pretty much a coin flip at 52% of the time.
Odds of a negative surprise with this combination of the Zacks
Rank and the Earnings ESP stand at 37%, with in-line performances
accounting for the rest.
This research suggests that both the Zacks Rank and the Earnings
ESP must be at least neutral in order to find the top stocks in a
given earnings season. A negative figure in either metric will
greatly increase the odds of a surprise to the downside meaning
that only a combination of the two can produce truly top stocks
for earnings season.
What About on the Short Side?
While the Earnings ESP figure and the Zacks Rank make a great
one-two punch for finding stocks that are likely to beat earnings
estimates, they haven't been as successful for finding stocks
that are likely to miss expectations.
Our research shows that if a stock has both a negative Earnings
ESP and a negative Zacks Rank (4 or 5), a positive surprise
occurs only 41% of the time with a negative surprise happening
47% of the time. While these figures do suggest that negative
surprises are certainly more likely, it obviously isn't as robust
of a metric as what investors see on the positive side.
For this reason, we suggest only applying the Earnings ESP in
concert with the Zacks Rank to find top stocks that are the most
likely to outperform their earnings estimates.
Earnings ESP Results
Now that you know which groups of stocks to focus on to increase
your chances of a positive surprise, let's look at the size of
the Earnings ESP that has historically generated the best
First, just having a positive Earnings ESP produces market
beating results. Over the last ten years, using a one-week
holding period (stocks were held for no more than one week after
they reported), the average annual return was 23.5%. This is in
stark contrast to stocks with a negative Earnings ESP, which
produced a -9.20% return with the same time filter.
If investors instead take the positive Earnings ESP and also
apply a Zacks Rank filter that only looks at stocks that have a
1, 2, or 3, the performance becomes even more impressive.
According to our research, over the past ten years using a
one-week holding period after the report date, stocks that
combined a positive earnings ESP and at least a neutral Zack Rank
saw annual returns of 28.3%.
Investors could drill down further into stocks with higher
Earnings ESP levels in order to boost their returns as well,
showing that a higher figure in this department can have a marked
improvement on stock price performance.
For stocks that have an Earnings ESP of at least 1%, the
one-week-after-report-date performance jumps up to an annual rate
of 29.6%. Meanwhile, an Earnings ESP of at least 2% increases
returns up to 31.6% annualized, and then finally an Earnings ESP
greater than 3% results in an
average annual return of 37.2%
Beyond that level, we did not see much of an added boost in terms
of stock performance above those figures. Furthermore, the sample
size for stocks with truly massive Earnings ESP figures is very
small, making it even more difficult to get a good reading, even
after a decade-long backtest.
Start Using Zacks Earnings ESP in Your Own Trading
The next time your stock is about to report or a security on your
watchlist is getting closer to the earnings date, be sure to look
at its Zacks Earnings ESP and see what your stock's probabilities
are of producing a positive surprise. You can find this figure on
any stock estimates page, and soon in the Zacks Earnings Center
Or if you want some professional help, we can find the best
Earnings ESP stocks for you with the
Whisper Trader Run by Jared Levy
. This investing service utilizes both the Zacks Earnings ESP
metric and the Zacks Rank to find the stocks that are the most
likely to beat earnings and outperform the market with stunning
levels of accuracy.
To read this article on Zacks.com click here.