Earnings are arguably the most important single number on a company’s quarterly financial report. Wall Street clearly dives into all of the other metrics and management’s input, but the EPS figure helps cut through all the noise.
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.
Hunting for ‘earnings whispers’ or companies poised to beat their quarterly earnings estimates is a somewhat common practice. But that doesn’t make it easy. One way that has been proven to work is by using the Zacks Earnings ESP tool.
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.
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.
In fact, when we combined a Zacks Rank #3 (Hold) or better and a positive Earnings ESP, stocks produced a positive surprise 70% of the time. Perhaps most importantly, using these parameters has helped produce 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 Stanley Black & Decker?
The final step today is to look at a stock that meets our ESP qualifications. Stanley Black & Decker (SWK) earns a #3 (Hold) 23 days from its next quarterly earnings release on October 27, 2023, and its Most Accurate Estimate comes in at $0.85 a share.
By taking the percentage difference between the $0.85 Most Accurate Estimate and the $0.82 Zacks Consensus Estimate, Stanley Black & Decker has an Earnings ESP of +3.2%. Investors should also know that SWK 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.
SWK is one of just a large database of Industrial Products stocks with positive ESPs. Another solid-looking stock is Cintas (CTAS).
Cintas is a Zacks Rank #3 (Hold) stock, and is getting ready to report earnings on December 20, 2023. CTAS’ Most Accurate Estimate sits at $3.49 a share 77 days from its next earnings release.
For Cintas, the percentage difference between its Most Accurate Estimate and its Zacks Consensus Estimate of $3.48 is +0.12%.
Because both stocks hold a positive Earnings ESP, SWK and CTAS could potentially post earnings beats in their next reports.
Stanley Black & Decker, Inc. (SWK): Free Stock Analysis Report
Cintas Corporation (CTAS): Free Stock Analysis Report
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This article originally appeared on Zacks
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