Two factors often determine stock prices in the long run: earnings and interest rates. Investors can't control the latter, but they can focus on a company's earnings results every quarter.
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.
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.
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.
Bringing together a positive earnings ESP alongside a Zacks Rank #3 (Hold) or better has helped stocks report a positive earnings surprise 70% of the time. Furthermore, by using these parameters, investors have seen 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 Palomar?
The final step today is to look at a stock that meets our ESP qualifications. Palomar (PLMR) earns a #2 (Buy) 14 days from its next quarterly earnings release on May 1, 2025, and its Most Accurate Estimate comes in at $1.62 a share.
Palomar's Earnings ESP sits at +1.57%, which, as explained above, is calculated by taking the percentage difference between the $1.62 Most Accurate Estimate and the Zacks Consensus Estimate of $1.59. PLMR 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.
PLMR is just one of a large group of Finance stocks with a positive ESP figure. Capital Southwest (CSWC) is another qualifying stock you may want to consider.
Capital Southwest is a Zacks Rank #2 (Buy) stock, and is getting ready to report earnings on May 14, 2025. CSWC's Most Accurate Estimate sits at $0.64 a share 27 days from its next earnings release.
Capital Southwest's Earnings ESP figure currently stands at +3.23% after taking the percentage difference between its Most Accurate Estimate and its Zacks Consensus Estimate of $0.62.
Because both stocks hold a positive Earnings ESP, PLMR and CSWC 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 >>
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Palomar Holdings, Inc. (PLMR): Free Stock Analysis Report Capital Southwest Corporation (CSWC): Free Stock Analysis ReportThis article originally published on Zacks Investment Research (zacks.com).
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