Understanding the Importance of Earnings Surprises in Retail and Wholesale Stocks

The long-term performance of stocks is primarily influenced by two crucial factors: earnings and interest rates. Although interest rates are beyond investor control, earnings results—a company's quarterly financial performance—are a key area of focus. The stock market, much like life, is grounded in expectations. Surpassing expected financial results tends to be rewarded with a stock price increase, while failing to meet them can lead to negative outcomes. To maximize investment returns, investors are on the lookout for stocks that might deliver positive earnings surprises.

The Role of Zacks Earnings ESP in Investment Strategy

Investors interested in finding stocks that are poised to beat quarterly earnings estimates could turn to the Zacks Earnings Expected Surprise Prediction (ESP). This tool focuses on the most current analyst revisions, which could be more precise than older estimates because they often include the latest information. The Zacks Earnings ESP is calculated by comparing the Most Accurate Estimate—a recent projection by an analyst—to the Zacks Consensus Estimate. The percentage difference between these two figures constitutes the Zacks ESP value.

Combining a positive Earnings ESP with a Zacks Rank of #3 (Hold) or better has historically led to a 70% chance of a positive earnings surprise. Moreover, according to a 10-year backtest, this strategy has contributed to an impressive average annual return of 28.3%. Stocks are ranked on a scale where a #3 (Hold) indicates an expected market performance, while a #2 (Buy) and a #1 (Strong Buy) suggest the potential for above-average market performance. A Strong Buy ranking, in particular, indicates the highest likelihood of outperformance.

Case Studies: Expedia and Wayfair

Let's examine Expedia (EXPE) as an example of a stock that fits this ESP model. With a Zacks Rank of #3 (Hold) and an Earnings ESP of +5%, the company presents a promising scenario for investors. This ESP is derived from the difference between the Most Accurate Estimate at $1.75 per share and the Zacks Consensus Estimate of $1.67, indicating that Expedia could surpass expectations in its upcoming earnings release.

Looking at the broader Retail and Wholesale sector, investors should also notice Wayfair (W), a Zacks Rank #2 (Buy) stock, which shows a positive Earnings ESP of +8.31%. This figure reflects the potential for Wayfair to outperform consensus estimates in its forthcoming earnings announcement, with its Most Accurate Estimate at -$0.20 per share compared to the Zacks Consensus Estimate of -$0.22.

Identifying Stocks Pre-Earnings Release

To effectively leverage earnings surprises, investors can use the Zacks Earnings ESP Filter. This tool helps identify stocks more likely to provide positive—or negative—surprises before their earnings reports are released, presenting opportunities for timely and profitable trading during earnings season.

earnings, strategy, investment