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.
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 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 ranking of #3 (Hold), or 60% of all stocks covered by the Zacks Rank, are expected to perform in-line with the broader market. Stocks with rankings of #2 (Buy) and #1 (Strong Buy), 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 Oshkosh?
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. Oshkosh (OSK) holds a #2 (Buy) at the moment and its Most Accurate Estimate comes in at $2.19 a share 20 days away from its upcoming earnings release on January 30, 2024.
Oshkosh's Earnings ESP sits at +0.93%, which, as explained above, is calculated by taking the percentage difference between the $2.19 Most Accurate Estimate and the Zacks Consensus Estimate of $2.17. OSK is also part of a large group of stocks that boast a positive ESP. Make sure to utilize our Earnings ESP Filter to uncover the best stocks to buy or sell before they've reported.
OSK is just one of a large group of Auto, Tires and Trucks stocks with a positive ESP figure. Commercial Vehicle Group (CVGI) is another qualifying stock you may want to consider.
Commercial Vehicle Group is a Zacks Rank #3 (Hold) stock, and is getting ready to report earnings on March 4, 2024. CVGI's Most Accurate Estimate sits at $0.15 a share 54 days from its next earnings release.
Commercial Vehicle Group's Earnings ESP figure currently stands at +2.27% after taking the percentage difference between its Most Accurate Estimate and its Zacks Consensus Estimate of $0.15.
Because both stocks hold a positive Earnings ESP, OSK and CVGI could potentially post earnings beats in their next reports.
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 >>
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