How to Find Strong Finance Stocks Slated for Positive Earnings Surprises

Two main factors long-term stock prices depend on are earnings and interest rates. While investors cannot directly change interest rates, they can focus on analyzing a company's quarterly earnings results.

Earnings results are critical, yet how a company performs against earnings expectations can significantly affect stock prices in the short term. This is why investors are keen to capitalize on earnings surprises.

Searching for potential 'earnings whispers'—companies likely to exceed their earnings estimates—is a common and strategic practice, although it can be challenging. A proven method for this is utilizing the Zacks Earnings ESP tool.

The Zacks Earnings ESP, Explained

The Zacks Expected Surprise Prediction (ESP) tool is designed to harness the most recent analyst earnings revisions, as these tend to offer better accuracy than estimates from several weeks or months prior to an earnings release. The logic is simple: analysts who provide estimates closer to the report date likely have access to more current information.

The ESP model centers on comparing the Most Accurate Estimate with the Zacks Consensus Estimate, with the percentage difference between the two yielding the Expected Surprise Prediction. Incorporating the Zacks Rank into the ESP metric aids in identifying companies that are likely to outperform their consensus bottom-line estimates, potentially boosting their stock prices.

When combining a positive earnings ESP with a Zacks Rank of #3 (Hold) or better, stocks have historically reported positive earnings surprises 70% of the time. Moreover, applying these criteria, investors have experienced average annual returns of 28.3%, based on a decade-long backtest.

Stocks rated #3 (Hold), which make up about 60% of all stocks covered, are anticipated to perform in line with the broader market. However, stocks ranked #2 (Buy) and #1 (Strong Buy), representing the top 15% and top 5% of stocks, respectively, are expected to outperform the market. Particularly, Strong Buy stocks are predicted to outperform more consistently than other rankings.

Spotlight on Berkshire Hathaway B

Now that we understand the power of the Earnings ESP tool, let's take a look at a qualifying stock: Berkshire Hathaway B (BRK.B). Currently, it holds a #3 (Hold) rating, and its Most Accurate Estimate stands at $5.20 per share just 11 days ahead of its upcoming earnings report on November 1, 2024.

Berkshire Hathaway B's Earnings ESP is currently +8.11%, calculated by the difference between the $5.20 Most Accurate Estimate and the Zacks Consensus Estimate of $4.81. This stock is among several finance stocks with a positive ESP. The Earnings ESP Filter can help identify the best stocks to consider before earnings reports.

In addition to BRK.B, another noteworthy stock is Arch Capital Group (ACGL). It also holds a Zacks Rank #3 (Hold) and is set to report earnings on October 30, 2024. ACGL’s Most Accurate Estimate is $2.14 per share.

Arch Capital Group's Earnings ESP currently stands at +7.91%, reflecting the difference between its Most Accurate Estimate and its Zacks Consensus Estimate of $1.98. Both BRK.B and ACGL have a positive Earnings ESP, suggesting they could potentially achieve earnings beats in their next reports.

Identifying Stocks to Buy or Sell Before Reporting

With the Zacks Earnings ESP Filter, you can discover stocks with the highest probability of positively or negatively surprising expectations, allowing for informed buying or selling decisions ahead of earnings announcements. This tool is essential for effective earnings season trading.

finance, stocks, earnings