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.
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.
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 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.
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.
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 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 Dollar General?
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. Dollar General (DG) earns a #3 (Hold) right now and its Most Accurate Estimate sits at $1.53 a share, just 15 days from its upcoming earnings release on June 3, 2025.
By taking the percentage difference between the $1.53 Most Accurate Estimate and the $1.48 Zacks Consensus Estimate, Dollar General has an Earnings ESP of +3.67%. Investors should also know that DG 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.
DG is one of just a large database of Retail and Wholesale stocks with positive ESPs. Another solid-looking stock is Ross Stores (ROST).
Ross Stores is a Zacks Rank #3 (Hold) stock, and is getting ready to report earnings on May 22, 2025. ROST's Most Accurate Estimate sits at $1.44 a share three days from its next earnings release.
For Ross Stores, the percentage difference between its Most Accurate Estimate and its Zacks Consensus Estimate of $1.43 is +0.92%.
Because both stocks hold a positive Earnings ESP, DG and ROST 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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Dollar General Corporation (DG): Free Stock Analysis Report Ross Stores, Inc. (ROST): Free Stock Analysis ReportThis article originally published on Zacks Investment Research (zacks.com).
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