Earnings are arguably the most important single number on a company's quarterly financial report. Wall Street clearly dives into all of the other metrics and management's input, but the EPS figure helps cut through all the noise.
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.
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.
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.
When we join a positive earnings ESP with a Zacks Rank #3 (Hold) or stronger, stocks posted a positive bottom-line surprise 70% of the time. Plus, this system saw investors produce roughly 28% 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 Paccar?
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. Paccar (PCAR) earns a #2 (Buy) right now and its Most Accurate Estimate sits at $1.70 a share, just 11 days from its upcoming earnings release on January 28, 2025.
By taking the percentage difference between the $1.70 Most Accurate Estimate and the $1.68 Zacks Consensus Estimate, Paccar has an Earnings ESP of +1.19%. Investors should also know that PCAR 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.
PCAR is one of just a large database of Auto, Tires and Trucks stocks with positive ESPs. Another solid-looking stock is Allison Transmission (ALSN).
Slated to report earnings on February 11, 2025, Allison Transmission holds a #2 (Buy) ranking on the Zacks Rank, and it's Most Accurate Estimate is $2.11 a share 25 days from its next quarterly update.
For Allison Transmission, the percentage difference between its Most Accurate Estimate and its Zacks Consensus Estimate of $1.93 is +9.33%.
PCAR and ALSN'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 >>
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PACCAR Inc. (PCAR) : Free Stock Analysis Report
Allison Transmission Holdings, Inc. (ALSN) : Free Stock Analysis Report
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The views and opinions expressed herein are the views and opinions of the author and do not necessarily reflect those of Nasdaq, Inc.
