Quarterly financial reports play a vital role on Wall Street, as they help investors see how a company has performed and what might be coming down the road in the near-term. And out of all of the metrics and results to consider, earnings is one of the most important.
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.
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 boost their returns by utilizing the Zacks Earnings ESP filter.
The Zacks Earnings ESP, Explained
The Zacks Expected Surprise Prediction, or ESP, works by locking in on the most up-to-date analyst earnings revisions because they can be more accurate than estimates from weeks or even months before the actual release date. The thinking is pretty straightforward: analysts who provide earnings estimates closer to the report are likely to have more information.
Now that we understand the basic idea, let's look at how the Expected Surprise Prediction works. The 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, 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 Sanofi?
Now that we understand what the ESP is and how beneficial it can be, let's dive into a stock that currently fits the bill. Sanofi (SNY) earns a #2 (Buy) right now and its Most Accurate Estimate sits at $0.91 a share, just 29 days from its upcoming earnings release on February 3, 2023.
SNY has an Earnings ESP figure of +2.25%, which, as explained above, is calculated by taking the percentage difference between the $0.91 Most Accurate Estimate and the Zacks Consensus Estimate of $0.89. Sanofi is one of a large database of stocks with positive ESPs. Make sure to utilize our Earnings ESP Filter to uncover the best stocks to buy or sell before they've reported.
SNY is part of a big group of Medical stocks that boast a positive ESP, and investors may want to take a look at HEXO (HEXO) as well.
Slated to report earnings on March 16, 2023, HEXO holds a #3 (Hold) ranking on the Zacks Rank, and it's Most Accurate Estimate is -$0.14 a share 70 days from its next quarterly update.
The Zacks Consensus Estimate for HEXO is -$0.21, and when you take the percentage difference between that number and its Most Accurate Estimate, you get the Earnings ESP figure of +33.08%.
SNY and HEXO's positive ESP figures tell us that both stocks have a good chance at beating analyst expectations in their next earnings report.
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 >>
The views and opinions expressed herein are the views and opinions of the author and do not necessarily reflect those of Nasdaq, Inc.