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.
The ability to identify stocks that are likely to top quarterly earnings expectations can be profitable, but it's no simple task. Here at Zacks, our Earnings ESP filter helps make things easier.
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.
Most stocks, about 60%, fall into the #3 (Hold) category, and they are expected to perform in-line with the broader market. Stocks with a #2 (Buy) and #1 (Strong Buy) rating, or the top 15% and top 5% of stocks, respectively, should outperform the market, with Strong Buy stocks outperforming more than any other rank.
Should You Consider Virtu Financial?
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. Virtu Financial (VIRT) holds a #3 (Hold) at the moment and its Most Accurate Estimate comes in at $1.17 a share two days away from its upcoming earnings release on April 23, 2025.
VIRT has an Earnings ESP figure of +3.08%, which, as explained above, is calculated by taking the percentage difference between the $1.17 Most Accurate Estimate and the Zacks Consensus Estimate of $1.14. Virtu Financial 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.
VIRT is part of a big group of Finance stocks that boast a positive ESP, and investors may want to take a look at Annaly Capital Management (NLY) as well.
Annaly Capital Management, which is readying to report earnings on April 30, 2025, sits at a Zacks Rank #2 (Buy) right now. It's Most Accurate Estimate is currently $0.73 a share, and NLY is nine days out from its next earnings report.
For Annaly Capital Management, the percentage difference between its Most Accurate Estimate and its Zacks Consensus Estimate of $0.71 is +3.55%.
Because both stocks hold a positive Earnings ESP, VIRT and NLY 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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Virtu Financial, Inc. (VIRT): Free Stock Analysis Report Annaly Capital Management Inc (NLY): Free Stock Analysis ReportThis article originally published on Zacks Investment Research (zacks.com).
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