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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.
We know earnings results are vital, but how a company performs compared to bottom line expectations can be even more important when it comes to stock prices, especially in the near-term. This means that investors might want to take advantage of these 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.
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.
When we join a positive earnings ESP with a Zacks Rank #3 (Hold) or stronger, stocks posted a positive bottom-line surprise 70% of the time. Plus, this system saw investors produce roughly 28% 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 Albemarle?
The final step today is to look at a stock that meets our ESP qualifications. Albemarle (ALB) earns a #3 (Hold) seven days from its next quarterly earnings release on November 3, 2021, and its Most Accurate Estimate comes in at $0.81 a share.
ALB has an Earnings ESP figure of 8.73%, which, as explained above, is calculated by taking the percentage difference between the $0.81 Most Accurate Estimate and the Zacks Consensus Estimate of $0.75. Albemarle is one of just a large database of stocks with positive ESPs. These stocks can be filtered by ESP, Zacks Rank, % Surprise (Last Qtr.), and Reporting date.
Don't forget to head to the Earnings ESP Home Page. There, you'll find lots more earnings-related investing strategies to help build a winning portfolio.
Find Stocks to Buy or Sell Before They're Reported
Use the Zacks Earnings ESP Filter to turn up stocks with the highest probability of positively, or negatively, surprising to buy or sell before they're reported for profitable earnings season trading. Check it out here >>
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Albemarle Corporation (ALB) : Free Stock Analysis Report
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