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.
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, 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.
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 Lowe's?
The final step today is to look at a stock that meets our ESP qualifications. Lowe's (LOW) earns a #3 (Hold) 23 days from its next quarterly earnings release on May 21, 2025, and its Most Accurate Estimate comes in at $2.90 a share.
Lowe's Earnings ESP sits at +0.3%, which, as explained above, is calculated by taking the percentage difference between the $2.90 Most Accurate Estimate and the Zacks Consensus Estimate of $2.89. LOW 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.
LOW is just one of a large group of Retail and Wholesale stocks with a positive ESP figure. Wayfair (W) is another qualifying stock you may want to consider.
Wayfair, 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 -$0.17 a share, and W is three days out from its next earnings report.
The Zacks Consensus Estimate for Wayfair is -$0.18, and when you take the percentage difference between that number and its Most Accurate Estimate, you get the Earnings ESP figure of +7.88%.
LOW and W'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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Lowe's Companies, Inc. (LOW): Free Stock Analysis Report Wayfair Inc. (W): Free Stock Analysis ReportThis article originally published on Zacks Investment Research (zacks.com).
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