Wall Street watches a company's quarterly report closely to understand as much as possible about its recent performance and what to expect going forward. Of course, one figure often stands out among the rest: earnings.
Life and the stock market are both about expectations, and rising above what is expected is often rewarded, while falling short can come with negative consequences. Investors might want to try to capture stronger returns by finding positive 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 is more formally known as the Expected Surprise Prediction, and it aims to grab the inside track on the latest analyst estimate revisions ahead of a company's report. The idea is relatively intuitive as a newer projection might be based on more complete information.
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.
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 Royal Caribbean?
The final step today is to look at a stock that meets our ESP qualifications. Royal Caribbean (RCL) earns a #3 (Hold) 15 days from its next quarterly earnings release on April 29, 2025, and its Most Accurate Estimate comes in at $2.54 a share.
RCL has an Earnings ESP figure of +0.6%, which, as explained above, is calculated by taking the percentage difference between the $2.54 Most Accurate Estimate and the Zacks Consensus Estimate of $2.52. Royal Caribbean 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.
RCL is part of a big group of Consumer Discretionary stocks that boast a positive ESP, and investors may want to take a look at MGM Resorts (MGM) as well.
MGM Resorts is a Zacks Rank #3 (Hold) stock, and is getting ready to report earnings on April 30, 2025. MGM's Most Accurate Estimate sits at $0.62 a share 16 days from its next earnings release.
MGM Resorts' Earnings ESP figure currently stands at +14.16% after taking the percentage difference between its Most Accurate Estimate and its Zacks Consensus Estimate of $0.54.
RCL and MGM'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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Royal Caribbean Cruises Ltd. (RCL): Free Stock Analysis Report MGM Resorts International (MGM): Free Stock Analysis ReportThis article originally published on Zacks Investment Research (zacks.com).
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