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.
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.
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 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.
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 Lemonade?
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. Lemonade (LMND) earns a #3 (Hold) right now and its Most Accurate Estimate sits at -$0.91 a share, just 26 days from its upcoming earnings release on April 29, 2025.
LMND has an Earnings ESP figure of +3.4%, which, as explained above, is calculated by taking the percentage difference between the -$0.91 Most Accurate Estimate and the Zacks Consensus Estimate of -$0.94. Lemonade 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.
LMND is part of a big group of Finance stocks that boast a positive ESP, and investors may want to take a look at Healthpeak (DOC) as well.
Healthpeak is a Zacks Rank #3 (Hold) stock, and is getting ready to report earnings on April 24, 2025. DOC's Most Accurate Estimate sits at $0.46 a share 21 days from its next earnings release.
Healthpeak's Earnings ESP figure currently stands at +0.35% after taking the percentage difference between its Most Accurate Estimate and its Zacks Consensus Estimate of $0.46.
LMND and DOC's positive ESP figures tell us that both stocks have a good chance at beating analyst expectations in their next earnings report.
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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Lemonade, Inc. (LMND): Free Stock Analysis Report Healthpeak Properties, Inc. (DOC): Free Stock Analysis ReportThis article originally published on Zacks Investment Research (zacks.com).
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