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.
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.
Hunting for 'earnings whispers' or companies poised to beat their quarterly earnings estimates is a somewhat common practice. But that doesn't make it easy. One way that has been proven to work is by using the Zacks Earnings ESP tool.
The Zacks Earnings ESP, Explained
The Zacks Expected Surprise Prediction, or ESP, works by locking in on the most up-to-date analyst earnings revisions because they can be more accurate than estimates from weeks or even months before the actual release date. The thinking is pretty straightforward: analysts who provide earnings estimates closer to the report are likely to have more information.
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.
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 MercadoLibre?
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. MercadoLibre (MELI) holds a #3 (Hold) at the moment and its Most Accurate Estimate comes in at $7.85 a share one day away from its upcoming earnings release on May 1, 2025.
MercadoLibre's Earnings ESP sits at +2.3%, which, as explained above, is calculated by taking the percentage difference between the $7.85 Most Accurate Estimate and the Zacks Consensus Estimate of $7.67. MELI 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.
MELI is one of just a large database of Retail and Wholesale stocks with positive ESPs. Another solid-looking stock is Alibaba (BABA).
Slated to report earnings on May 13, 2025, Alibaba holds a #2 (Buy) ranking on the Zacks Rank, and it's Most Accurate Estimate is $2.09 a share 13 days from its next quarterly update.
The Zacks Consensus Estimate for Alibaba is $1.48, and when you take the percentage difference between that number and its Most Accurate Estimate, you get the Earnings ESP figure of +41.7%.
Because both stocks hold a positive Earnings ESP, MELI and BABA 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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MercadoLibre, Inc. (MELI): Free Stock Analysis Report Alibaba Group Holding Limited (BABA): Free Stock Analysis ReportThis article originally published on Zacks Investment Research (zacks.com).
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