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.
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, or Expected Surprise Prediction, aims to find earnings surprises by focusing on the most recent analyst revisions. The basic premise is that if an analyst reevaluates their earnings estimate ahead of an earnings release, it means they likely have new information that could possibly be more accurate.
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.
In fact, when we combined a Zacks Rank #3 (Hold) or better and a positive Earnings ESP, stocks produced a positive surprise 70% of the time. Perhaps most importantly, using these parameters has helped produce 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 Devon Energy?
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. Devon Energy (DVN) holds a #3 (Hold) at the moment and its Most Accurate Estimate comes in at $1.28 a share 13 days away from its upcoming earnings release on May 6, 2025.
Devon Energy's Earnings ESP sits at +2.68%, which, as explained above, is calculated by taking the percentage difference between the $1.28 Most Accurate Estimate and the Zacks Consensus Estimate of $1.25. DVN 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.
DVN is just one of a large group of Oils and Energy stocks with a positive ESP figure. Exxon Mobil (XOM) is another qualifying stock you may want to consider.
Slated to report earnings on May 2, 2025, Exxon Mobil holds a #3 (Hold) ranking on the Zacks Rank, and it's Most Accurate Estimate is $1.75 a share nine days from its next quarterly update.
The Zacks Consensus Estimate for Exxon Mobil is $1.72, and when you take the percentage difference between that number and its Most Accurate Estimate, you get the Earnings ESP figure of +1.74%.
DVN and XOM's positive ESP metrics may signal that a positive earnings surprise for both stocks is on the horizon.
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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Devon Energy Corporation (DVN): Free Stock Analysis Report Exxon Mobil Corporation (XOM): Free Stock Analysis ReportThis article originally published on Zacks Investment Research (zacks.com).
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