Benzinga - by Zacks, Benzinga Contributor.
Quarterly financial reports play a vital role on Wall Street, as they help investors see how a company has performed and what might be coming down the road in the near-term. And out of all of the metrics and results to consider, earnings is one of the most important.
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.
Hunting for 'earnings whispers' or companies poised to beat their quarterly earnings estimates is a somewhat common practice. But that doesn't make it easy. One way that has been proven to work is by using the Zacks Earnings ESP tool.
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.
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.
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 Amazon?
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. Amazon (NASDAQ: AMZN) holds a #2 (Buy) at the moment and its Most Accurate Estimate comes in at $0.88 a share 30 days away from its upcoming earnings release on April 25, 2024.
Amazon's Earnings ESP sits at +8.64%, which, as explained above, is calculated by taking the percentage difference between the $0.88 Most Accurate Estimate and the Zacks Consensus Estimate of $0.81. AMZN 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.
AMZN is just one of a large group of Retail and Wholesale stocks with a positive ESP figure. Walmart (NYSE: WMT) is another qualifying stock you may want to consider.
Walmart is a Zacks Rank #3 (Hold) stock, and is getting ready to report earnings on May 16, 2024. WMT's Most Accurate Estimate sits at $0.52 a share 51 days from its next earnings release.
The Zacks Consensus Estimate for Walmart is $0.52, and when you take the percentage difference between that number and its Most Accurate Estimate, you get the Earnings ESP figure of +0.43%.
Because both stocks hold a positive Earnings ESP, AMZN and WMT could potentially post earnings beats in their next reports.
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