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.
Life and the stock market are both about expectations, and rising above what is expected is often rewarded, while falling short can come with negative consequences. Investors might want to try to capture stronger returns by finding positive 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 Earnings ESP is more formally known as the Expected Surprise Prediction, and it aims to grab the inside track on the latest analyst estimate revisions ahead of a company's report. The idea is relatively intuitive as a newer projection might be based on more complete 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.
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 Louisiana-Pacific?
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. Louisiana-Pacific (LPX) holds a #3 (Hold) at the moment and its Most Accurate Estimate comes in at $0.83 a share 30 days away from its upcoming earnings release on February 12, 2025.
By taking the percentage difference between the $0.83 Most Accurate Estimate and the $0.74 Zacks Consensus Estimate, Louisiana-Pacific has an Earnings ESP of +11.79%. Investors should also know that LPX 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.
LPX is part of a big group of Construction stocks that boast a positive ESP, and investors may want to take a look at Aspen Aerogels (ASPN) as well.
Slated to report earnings on February 10, 2025, Aspen Aerogels holds a #3 (Hold) ranking on the Zacks Rank, and it's Most Accurate Estimate is $0.14 a share 28 days from its next quarterly update.
The Zacks Consensus Estimate for Aspen Aerogels is $0.09, and when you take the percentage difference between that number and its Most Accurate Estimate, you get the Earnings ESP figure of +53.12%.
Because both stocks hold a positive Earnings ESP, LPX and ASPN 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 >>
7 Best Stocks for the Next 30 Days
Just released: Experts distill 7 elite stocks from the current list of 220 Zacks Rank #1 Strong Buys. They deem these tickers "Most Likely for Early Price Pops."
Since 1988, the full list has beaten the market more than 2X over with an average gain of +24.1% per year. So be sure to give these hand picked 7 your immediate attention.
See them now >>Louisiana-Pacific Corporation (LPX) : Free Stock Analysis Report
Aspen Aerogels, Inc. (ASPN) : Free Stock Analysis Report
To read this article on Zacks.com click here.
The views and opinions expressed herein are the views and opinions of the author and do not necessarily reflect those of Nasdaq, Inc.
