Wall Street watches a company’s quarterly report closely to understand as much as possible about its recent performance and what to expect going forward. Of course, one figure often stands out among the rest: earnings.
We know earnings results are vital, but how a company performs compared to bottom line expectations can be even more important when it comes to stock prices, especially in the near-term. This means that investors might want to take advantage of these earnings surprises.
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 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.
With this in mind, the Expected Surprise Prediction compares the Most Accurate Estimate (being the most recent) against the overall Zacks Consensus Estimate. The percentage difference provides the ESP figure. The system also utilizes our core Zacks Rank to provide a stronger system for identifying stocks that might beat their next quarterly earnings estimate and possibly see the stock price climb.
Bringing together a positive earnings ESP alongside a Zacks Rank #3 (Hold) or better has helped stocks report a positive earnings surprise 70% of the time. Furthermore, by using these parameters, investors have seen 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 Smucker?
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. Smucker (SJM) holds a #2 (Buy) at the moment and its Most Accurate Estimate comes in at $2.08 a share six days away from its upcoming earnings release on August 29, 2023.
By taking the percentage difference between the $2.08 Most Accurate Estimate and the $2.07 Zacks Consensus Estimate, Smucker has an Earnings ESP of +0.24%. Investors should also know that SJM is one of a large group 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.
SJM is part of a big group of Consumer Staples stocks that boast a positive ESP, and investors may want to take a look at Monster Beverage (MNST) as well.
Monster Beverage, which is readying to report earnings on November 2, 2023, sits at a Zacks Rank #3 (Hold) right now. It’s Most Accurate Estimate is currently $0.40 a share, and MNST is 71 days out from its next earnings report.
Monster Beverage’s Earnings ESP figure currently stands at +0.24% after taking the percentage difference between its Most Accurate Estimate and its Zacks Consensus Estimate of $0.40.
SJM and MNST’s positive ESP metrics may signal that a positive earnings surprise for both stocks is on the horizon.
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 J. M. Smucker Company (SJM): Free Stock Analysis Report
Monster Beverage Corporation (MNST): Free Stock Analysis Report
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Zacks Investment Research
This article originally appeared on Zacks
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