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.
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.
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 Novartis?
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. Novartis (NVS) earns a #3 (Hold) right now and its Most Accurate Estimate sits at $2.15 a share, just five days from its upcoming earnings release on April 22, 2025.
By taking the percentage difference between the $2.15 Most Accurate Estimate and the $2.12 Zacks Consensus Estimate, Novartis has an Earnings ESP of +1.26%. Investors should also know that NVS is one of a large group 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.
NVS is one of just a large database of Medical stocks with positive ESPs. Another solid-looking stock is Elevance Health (ELV).
Slated to report earnings on April 22, 2025, Elevance Health holds a #3 (Hold) ranking on the Zacks Rank, and it's Most Accurate Estimate is $11.62 a share five days from its next quarterly update.
The Zacks Consensus Estimate for Elevance Health is $11.15, and when you take the percentage difference between that number and its Most Accurate Estimate, you get the Earnings ESP figure of +4.21%.
NVS and ELV'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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Novartis AG (NVS): Free Stock Analysis Report Elevance Health, Inc. (ELV): Free Stock Analysis ReportThis article originally published on Zacks Investment Research (zacks.com).
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