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.
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 is more formally known as the Expected Surprise Prediction, and it aims to grab the inside track on the latest analyst estimate revisions ahead of a company’s report. The idea is relatively intuitive as a newer projection might be based on more complete 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 Arch Capital Group?
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. Arch Capital Group (ACGL) holds a #3 (Hold) at the moment and its Most Accurate Estimate comes in at $1.51 a share 29 days away from its upcoming earnings release on October 25, 2023.
By taking the percentage difference between the $1.51 Most Accurate Estimate and the $1.26 Zacks Consensus Estimate, Arch Capital Group has an Earnings ESP of +20%. Investors should also know that ACGL 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.
ACGL is just one of a large group of Finance stocks with a positive ESP figure. Zions (ZION) is another qualifying stock you may want to consider.
Zions, which is readying to report earnings on October 18, 2023, sits at a Zacks Rank #3 (Hold) right now. It’s Most Accurate Estimate is currently $1.10 a share, and ZION is 22 days out from its next earnings report.
The Zacks Consensus Estimate for Zions is $1.09, and when you take the percentage difference between that number and its Most Accurate Estimate, you get the Earnings ESP figure of +0.76%.
ACGL and ZION’s positive ESP metrics may signal that a positive earnings surprise for both stocks is on the horizon.
Arch Capital Group Ltd. (ACGL): Free Stock Analysis Report
Zions Bancorporation, N.A. (ZION): Free Stock Analysis Report
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