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.

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.

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 Livent?

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. Livent (LTHM) holds a #1 (Strong Buy) at the moment and its Most Accurate Estimate comes in at $0.47 a share 14 days away from its upcoming earnings release on August 3, 2023.

By taking the percentage difference between the $0.47 Most Accurate Estimate and the $0.45 Zacks Consensus Estimate, Livent has an Earnings ESP of +3.58%. Investors should also know that LTHM 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.

LTHM is part of a big group of Basic Materials stocks that boast a positive ESP, and investors may want to take a look at Agnico Eagle Mines (AEM) as well.

Slated to report earnings on July 26, 2023, Agnico Eagle Mines holds a #3 (Hold) ranking on the Zacks Rank, and it’s Most Accurate Estimate is $0.56 a share six days from its next quarterly update.

For Agnico Eagle Mines, the percentage difference between its Most Accurate Estimate and its Zacks Consensus Estimate of $0.54 is +3.84%.

LTHM and AEM’s positive ESP metrics may signal that a positive earnings surprise for both stocks is on the horizon.

Livent Corporation (LTHM): Free Stock Analysis Report

Agnico Eagle Mines Limited (AEM): Free Stock Analysis Report

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Zacks Investment Research

This article originally appeared on Zacks

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