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.
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 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 TransDigm Group?
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. TransDigm Group (TDG) holds a #3 (Hold) at the moment and its Most Accurate Estimate comes in at $9.40 a share 19 days away from its upcoming earnings release on May 6, 2025.
TransDigm Group's Earnings ESP sits at +6.05%, which, as explained above, is calculated by taking the percentage difference between the $9.40 Most Accurate Estimate and the Zacks Consensus Estimate of $8.86. TDG 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.
TDG is just one of a large group of Aerospace stocks with a positive ESP figure. General Dynamics (GD) is another qualifying stock you may want to consider.
General Dynamics, which is readying to report earnings on April 23, 2025, sits at a Zacks Rank #3 (Hold) right now. It's Most Accurate Estimate is currently $3.50 a share, and GD is six days out from its next earnings report.
For General Dynamics, the percentage difference between its Most Accurate Estimate and its Zacks Consensus Estimate of $3.47 is +0.83%.
Because both stocks hold a positive Earnings ESP, TDG and GD 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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Transdigm Group Incorporated (TDG): Free Stock Analysis Report General Dynamics Corporation (GD): Free Stock Analysis ReportThis article originally published on Zacks Investment Research (zacks.com).
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