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, 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.
The core of the ESP model is comparing the Most Accurate Estimate to the Zacks Consensus Estimate, where the resulting percentage difference between the two equals the Expected Surprise Prediction. The Zacks Rank is also factored into the ESP metric to better help find companies that appear poised to top their next bottom-line consensus estimate, which will hopefully help lift the stock price.
When we join a positive earnings ESP with a Zacks Rank #3 (Hold) or stronger, stocks posted a positive bottom-line surprise 70% of the time. Plus, this system saw investors produce roughly 28% 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 Monolithic Power?
The final step today is to look at a stock that meets our ESP qualifications. Monolithic Power (MPWR) earns a #3 (Hold) seven days from its next quarterly earnings release on May 1, 2025, and its Most Accurate Estimate comes in at $4.01 a share.
By taking the percentage difference between the $4.01 Most Accurate Estimate and the $4 Zacks Consensus Estimate, Monolithic Power has an Earnings ESP of +0.17%. Investors should also know that MPWR 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.
MPWR is part of a big group of Computer and Technology stocks that boast a positive ESP, and investors may want to take a look at Baidu Inc. (BIDU) as well.
Baidu Inc. which is readying to report earnings on May 21, 2025, sits at a Zacks Rank #2 (Buy) right now. It's Most Accurate Estimate is currently $2.13 a share, and BIDU is 27 days out from its next earnings report.
For Baidu Inc. the percentage difference between its Most Accurate Estimate and its Zacks Consensus Estimate of $1.96 is +8.67%.
MPWR and BIDU'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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Monolithic Power Systems, Inc. (MPWR): Free Stock Analysis Report Baidu, Inc. (BIDU): Free Stock Analysis ReportThis article originally published on Zacks Investment Research (zacks.com).
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