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.
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 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.
With this in mind, the Expected Surprise Prediction compares the Most Accurate Estimate (being the most recent) against the overall Zacks Consensus Estimate. The percentage difference provides the ESP figure. The system also utilizes our core Zacks Rank to provide a stronger system for identifying stocks that might beat their next quarterly earnings estimate and possibly see the stock price climb.
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 #3 (Hold) ranking, which is most stocks covered at 60%, are expected to perform in-line with the broader market. But stocks that fall into the #2 (Buy) and #1 (Strong Buy) ranking, 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 Darden Restaurants?
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. Darden Restaurants (DRI) earns a #2 (Buy) right now and its Most Accurate Estimate sits at $1.73 a share, just 10 days from its upcoming earnings release on September 21, 2023.
Darden Restaurants’ Earnings ESP sits at +0.72%, which, as explained above, is calculated by taking the percentage difference between the $1.73 Most Accurate Estimate and the Zacks Consensus Estimate of $1.72. DRI 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.
DRI is just one of a large group of Retail and Wholesale stocks with a positive ESP figure. Williams-Sonoma (WSM) is another qualifying stock you may want to consider.
Slated to report earnings on November 16, 2023, Williams-Sonoma holds a #3 (Hold) ranking on the Zacks Rank, and it’s Most Accurate Estimate is $3.38 a share 66 days from its next quarterly update.
The Zacks Consensus Estimate for Williams-Sonoma is $3.36, and when you take the percentage difference between that number and its Most Accurate Estimate, you get the Earnings ESP figure of +0.6%.
Because both stocks hold a positive Earnings ESP, DRI and WSM could potentially post earnings beats in their next reports.
Darden Restaurants, Inc. (DRI): Free Stock Analysis Report
This article originally appeared on Zacks
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