Two factors often determine stock prices in the long run: earnings and interest rates. Investors can't control the latter, but they can focus on a company's earnings results every quarter.
We know earnings results are vital, but how a company performs compared to bottom line expectations can be even more important when it comes to stock prices, especially in the near-term. This means that investors might want to take advantage of these 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.
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.
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 #3 (Hold) ranking, which is most stocks covered at 60%, are expected to perform in-line with the broader market. But stocks that fall into the #2 (Buy) and #1 (Strong Buy) ranking, 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 Atmos Energy?
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. Atmos Energy (ATO) earns a #2 (Buy) right now and its Most Accurate Estimate sits at $2.96 a share, just 14 days from its upcoming earnings release on May 7, 2025.
ATO has an Earnings ESP figure of +2.6%, which, as explained above, is calculated by taking the percentage difference between the $2.96 Most Accurate Estimate and the Zacks Consensus Estimate of $2.89. Atmos Energy 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.
ATO is part of a big group of Utilities stocks that boast a positive ESP, and investors may want to take a look at Southern Co. (SO) as well.
Southern Co. which is readying to report earnings on May 1, 2025, sits at a Zacks Rank #3 (Hold) right now. It's Most Accurate Estimate is currently $1.19 a share, and SO is eight days out from its next earnings report.
The Zacks Consensus Estimate for Southern Co. is $1.18, and when you take the percentage difference between that number and its Most Accurate Estimate, you get the Earnings ESP figure of +1.47%.
ATO and SO'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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Atmos Energy Corporation (ATO): Free Stock Analysis Report Southern Company (The) (SO): Free Stock Analysis ReportThis article originally published on Zacks Investment Research (zacks.com).
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