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.

The ability to identify stocks that are likely to top quarterly earnings expectations can be profitable, but it’s no simple task. Here at Zacks, our Earnings ESP filter helps make things easier.

The Zacks Earnings ESP, Explained

The Zacks Earnings ESP, or Expected Surprise Prediction, aims to find earnings surprises by focusing on the most recent analyst revisions. The basic premise is that if an analyst reevaluates their earnings estimate ahead of an earnings release, it means they likely have new information that could possibly be more accurate.

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.

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.

Most stocks, about 60%, fall into the #3 (Hold) category, and they are expected to perform in-line with the broader market. Stocks with a #2 (Buy) and #1 (Strong Buy) rating, or the top 15% and top 5% of stocks, respectively, should outperform the market, with Strong Buy stocks outperforming more than any other rank.

Should You Consider Taylor Morrison Home?

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. Taylor Morrison Home (TMHC) earns a #2 (Buy) right now and its Most Accurate Estimate sits at $1.70 a share, just six days from its upcoming earnings release on July 26, 2023.

Taylor Morrison Home’s Earnings ESP sits at +2.41%, which, as explained above, is calculated by taking the percentage difference between the $1.70 Most Accurate Estimate and the Zacks Consensus Estimate of $1.66. TMHC is also part of a large group of stocks that boast a positive ESP. Make sure to utilize our Earnings ESP Filter to uncover the best stocks to buy or sell before they’ve reported.

TMHC is part of a big group of Construction stocks that boast a positive ESP, and investors may want to take a look at Vulcan Materials (VMC) as well.

Slated to report earnings on August 3, 2023, Vulcan Materials holds a #2 (Buy) ranking on the Zacks Rank, and it’s Most Accurate Estimate is $2.03 a share 14 days from its next quarterly update.

The Zacks Consensus Estimate for Vulcan Materials is $1.92, and when you take the percentage difference between that number and its Most Accurate Estimate, you get the Earnings ESP figure of +5.94%.

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

Taylor Morrison Home Corporation (TMHC): Free Stock Analysis Report

Vulcan Materials Company (VMC): Free Stock Analysis Report

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This article originally appeared on Zacks

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