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.
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 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.
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.
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 Eli Lilly?
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. Eli Lilly (LLY) holds a #3 (Hold) at the moment and its Most Accurate Estimate comes in at $4.67 a share 30 days away from its upcoming earnings release on May 1, 2025.
LLY has an Earnings ESP figure of +0.61%, which, as explained above, is calculated by taking the percentage difference between the $4.67 Most Accurate Estimate and the Zacks Consensus Estimate of $4.64. Eli Lilly is one of a large database 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.
LLY is just one of a large group of Medical stocks with a positive ESP figure. Elevance Health (ELV) is another qualifying stock you may want to consider.
Elevance Health is a Zacks Rank #3 (Hold) stock, and is getting ready to report earnings on April 17, 2025. ELV's Most Accurate Estimate sits at $11.47 a share 16 days from its next earnings release.
The Zacks Consensus Estimate for Elevance Health is $10.80, and when you take the percentage difference between that number and its Most Accurate Estimate, you get the Earnings ESP figure of +6.22%.
Because both stocks hold a positive Earnings ESP, LLY and ELV 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 >>
Want the latest recommendations from Zacks Investment Research? Today, you can download 7 Best Stocks for the Next 30 Days. Click to get this free report
Eli Lilly and Company (LLY): Free Stock Analysis Report Elevance Health, Inc. (ELV): Free Stock Analysis ReportThis article originally published on Zacks Investment Research (zacks.com).
Zacks Investment Research
