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How to Find Strong Medical Stocks Slated for Positive Earnings Surprises

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Two factors often determine stock prices in the long run: earnings and interest rates. Investors can't control the latter, but they can focus on a company's earnings results every quarter.

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.

The ability to identify stocks that are likely to top quarterly earnings expectations can be profitable, but it's no simple task. Here at Zacks, our Earnings ESP filter helps make things easier.

The Zacks Earnings ESP, Explained

The Zacks Earnings ESP is more formally known as the Expected Surprise Prediction, and it aims to grab the inside track on the latest analyst estimate revisions ahead of a company's report. The idea is relatively intuitive as a newer projection might be based on more complete information.

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.

Most stocks, about 60%, fall into the #3 (Hold) category, and they are expected to perform in-line with the broader market. Stocks with a #2 (Buy) and #1 (Strong Buy) rating, or the top 15% and top 5% of stocks, respectively, should outperform the market, with Strong Buy stocks outperforming more than any other rank.

Should You Consider Illumina?

The last thing we will do today, now that we have a grasp on the ESP and how powerful of a tool it can be, is to quickly look at a qualifying stock. Illumina (ILMN - Free Report) holds a #3 (Hold) at the moment and its Most Accurate Estimate comes in at $0.04 a share 13 days away from its upcoming earnings release on May 2, 2024.

Illumina's Earnings ESP sits at +50%, which, as explained above, is calculated by taking the percentage difference between the $0.04 Most Accurate Estimate and the Zacks Consensus Estimate of $0.03. ILMN 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.

ILMN is part of a big group of Medical stocks that boast a positive ESP, and investors may want to take a look at Humana (HUM - Free Report) as well.

Humana is a Zacks Rank #3 (Hold) stock, and is getting ready to report earnings on April 24, 2024. HUM's Most Accurate Estimate sits at $6.02 a share five days from its next earnings release.

The Zacks Consensus Estimate for Humana is $6.02, and when you take the percentage difference between that number and its Most Accurate Estimate, you get the Earnings ESP figure of +0.07%.

Because both stocks hold a positive Earnings ESP, ILMN and HUM could potentially post earnings beats in their next reports.

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 >>


See More Zacks Research for These Tickers


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Humana Inc. (HUM) - free report >>

Illumina, Inc. (ILMN) - free report >>

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