Earnings are arguably the most important single number on a company's quarterly financial report. Wall Street clearly dives into all of the other metrics and management's input, but the EPS figure helps cut through all the noise.
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.
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.
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.
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 Capital Southwest?
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. Capital Southwest (CSWC) holds a #2 (Buy) at the moment and its Most Accurate Estimate comes in at $0.64 a share 23 days away from its upcoming earnings release on May 14, 2025.
Capital Southwest's Earnings ESP sits at +3.23%, which, as explained above, is calculated by taking the percentage difference between the $0.64 Most Accurate Estimate and the Zacks Consensus Estimate of $0.62. CSWC 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.
CSWC is just one of a large group of Finance stocks with a positive ESP figure. Medical Properties (MPW) is another qualifying stock you may want to consider.
Medical Properties, which is readying to report earnings on May 8, 2025, sits at a Zacks Rank #3 (Hold) right now. It's Most Accurate Estimate is currently $0.17 a share, and MPW is 17 days out from its next earnings report.
The Zacks Consensus Estimate for Medical Properties is $0.15, and when you take the percentage difference between that number and its Most Accurate Estimate, you get the Earnings ESP figure of +12.68%.
Because both stocks hold a positive Earnings ESP, CSWC and MPW 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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Capital Southwest Corporation (CSWC): Free Stock Analysis Report Medical Properties Trust, Inc. (MPW): Free Stock Analysis ReportThis article originally published on Zacks Investment Research (zacks.com).
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