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.
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.
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.
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.
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 Capital Southwest?
The final step today is to look at a stock that meets our ESP qualifications. Capital Southwest (CSWC) earns a #2 (Buy) seven days from its next quarterly earnings release on May 14, 2025, and its Most Accurate Estimate comes in at $0.64 a share.
By taking the percentage difference between the $0.64 Most Accurate Estimate and the $0.62 Zacks Consensus Estimate, Capital Southwest has an Earnings ESP of +3.23%. Investors should also know that CSWC 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.
CSWC is just one of a large group of Finance stocks with a positive ESP figure. Palomar (PLMR) is another qualifying stock you may want to consider.
Palomar is a Zacks Rank #2 (Buy) stock, and is getting ready to report earnings on August 4, 2025. PLMR's Most Accurate Estimate sits at $1.73 a share 89 days from its next earnings release.
For Palomar, the percentage difference between its Most Accurate Estimate and its Zacks Consensus Estimate of $1.60 is +7.9%.
CSWC and PLMR'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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Capital Southwest Corporation (CSWC): Free Stock Analysis Report Palomar Holdings, Inc. (PLMR): Free Stock Analysis ReportThis article originally published on Zacks Investment Research (zacks.com).
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