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.
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 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.
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 Clearway Energy?
The final step today is to look at a stock that meets our ESP qualifications. Clearway Energy (CWEN) earns a #1 (Strong Buy) three days from its next quarterly earnings release on February 23, 2023, and its Most Accurate Estimate comes in at -$0.20 a share.
By taking the percentage difference between the -$0.20 Most Accurate Estimate and the -$0.88 Zacks Consensus Estimate, Clearway Energy has an Earnings ESP of +77.19%. Investors should also know that CWEN 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.
CWEN is just one of a large group of Oils and Energy stocks with a positive ESP figure. Plains All American Pipeline (PAA) is another qualifying stock you may want to consider.
Slated to report earnings on May 3, 2023, Plains All American Pipeline holds a #3 (Hold) ranking on the Zacks Rank, and it’s Most Accurate Estimate is $0.34 a share 72 days from its next quarterly update.
Plains All American Pipeline’s Earnings ESP figure currently stands at +4.69% after taking the percentage difference between its Most Accurate Estimate and its Zacks Consensus Estimate of $0.32.
CWEN and PAA’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 >>