Wall Street looks closely at a company’s quarterly report to understand as much as possible about its recent performance and what to expect going forward. Of course, one number always stands out among the rest: income.
Life and the stock market are both about expectations, and rising above expectations is often rewarded, while falling can have negative consequences. Investors may want to try to get stronger returns by looking for 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 increase their returns by using the Zacks Earnings ESP filter.
The Zacks Earnings ESP, Explained
Zacks Earnings ESP, or Expected Surprise Prediction, aims to find earnings surprises by focusing on the latest analyst revisions. The basic premise is that if an analyst re-evaluates their earnings estimate before the earnings release, it means they likely have new information that is potentially more accurate.
The core of the ESP model is the comparison of the Most Accurate Estimate with the Zacks Consensus Estimate, where the resulting percentage difference between the two equals the Expected Surprise Prediction. The Zacks Rank is also included in the ESP metric to better help find companies that look poised to top their next consensus estimate below, which is expected to help boost the stock price.
In fact, when we combine a Zacks Rank #3 (Hold) or better and a positive Earnings ESP, stocks make a positive surprise 70% of the time. Perhaps most importantly, using these parameters helped create 28.3% annual returns on average, according to our 10-year backtest.
Stocks ranked #3 (Hold), or 60% of all stocks covered by the Zacks Rank, are expected to move in line with the broader market. Stocks ranked #2 (Buy) and #1 (Strong Buy), or the top 15% and top 5% of stocks, respectively, should outperform the market; Strong Buy stocks should top all rankings.
Should You Consider Atlassian?
The final step now is to look at a stock that meets our ESP qualifications. Atlassian (TEAM – Free Report) earned a #3 (Hold) one day from its next quarterly earnings release on August 4, 2022, and its Best Estimate comes in at $0.27 a share.
TEAM has an Earnings ESP number of +1.92%, which, as explained above, is calculated by taking the percentage difference between the $0.27 Most Accurate Estimate and the Zacks Consensus Estimate of $0.26. Atlassian is one of a large database of stocks with positive ESPs. Be sure to use our Earnings ESP Filter to identify the best stocks to buy or sell before reporting them.
TEAM is part of a large group of Computer and Technology stocks that boast a positive ESP, and investors may want to take a look at 3D System (DDD – Free Report) as well.
3D Systems is a Zacks Rank #3 (Hold) stock, and is set to report earnings on August 8, 2022. DDD’s Best Estimate is $0.02 per share five days from the next earnings release .
For 3D Systems, the percentage difference between its Most Accurate Estimate and the Zacks Consensus Estimate of $0 is +900%.
The positive ESP numbers of TEAM and DDD tell us that both stocks have a good chance of beating analyst expectations in their next earnings report.
Find Stocks to Buy or Sell Before They Report
Use the Zacks Earnings ESP Filter to highlight stocks with the highest probability of positive, or negative, surprise buy or sell before they are reported for earnings during the trading period. Check it out here >>