How Investors Can Grab Better Returns for Finance Using the Zacks ESP Screener

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.

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, 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.

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.

Most stocks, about 60%, fall into the #3 (Hold) category, and they are expected to perform in-line with the broader market. Stocks with a #2 (Buy) and #1 (Strong Buy) rating, or the top 15% and top 5% of stocks, respectively, should outperform the market, with Strong Buy stocks outperforming more than any other rank.

Should You Consider Trinity Capital?

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. Trinity Capital (TRIN) holds a #3 (Hold) at the moment and its Most Accurate Estimate comes in at $0.55 a share 29 days away from its upcoming earnings release on November 3, 2022.

Trinity Capital's Earnings ESP sits at +5.77%, which, as explained above, is calculated by taking the percentage difference between the $0.55 Most Accurate Estimate and the Zacks Consensus Estimate of $0.52. TRIN 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.

TRIN is part of a big group of Finance stocks that boast a positive ESP, and investors may want to take a look at Wells Fargo (WFC) as well.

Wells Fargo, which is readying to report earnings on October 13, 2022, sits at a Zacks Rank #3 (Hold) right now. It's Most Accurate Estimate is currently $1.10 a share, and WFC is eight days out from its next earnings report.

The Zacks Consensus Estimate for Wells Fargo is $1.10, and when you take the percentage difference between that number and its Most Accurate Estimate, you get the Earnings ESP figure of +0.1%.

Because both stocks hold a positive Earnings ESP, TRIN and WFC 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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