How to Find Strong Retail and Wholesale Stocks Slated for Positive Earnings Surprises

The article highlights the Zacks Earnings ESP (Expected Surprise Prediction) tool, designed to forecast earnings surprises by comparing the most accurate analyst estimate against the consensus. This methodology, particularly when combined with a Zacks Rank of #3 (Hold) or better and a positive ESP, has historically predicted positive earnings surprises 70% of the time and generated average annual returns of 28.3% over a 10-year backtest. Texas Roadhouse (TXRH) and Ulta Beauty (ULTA) are presented as current examples with positive ESPs, suggesting a high probability of beating their respective upcoming earnings estimates.

Analysis

The provided research highlights the Zacks Earnings ESP (Expected Surprise Prediction) methodology as a tool for forecasting earnings surprises, focusing on the most recent analyst estimate revisions. The model's historical performance, when combining a positive ESP with a Zacks Rank of #3 (Hold) or better, is notable, reportedly producing positive earnings surprises 70% of the time and generating an average annual return of 28.3% based on a 10-year backtest. Two specific companies are identified as currently qualifying under this model. Texas Roadhouse (TXRH) exhibits strong signals with a Zacks Rank of #2 (Buy) and a positive ESP of +3.34%, derived from its Most Accurate Estimate of $1.70 per share versus a consensus of $1.65 ahead of its July 25 report. Ulta Beauty (ULTA) also shows a positive signal, though more modest, with a Zacks Rank of #3 (Hold) and an ESP of +0.74%, based on a Most Accurate Estimate of $5.56 against a consensus of $5.52 for its August 22 report. According to the presented methodology, both companies possess a statistically significant chance of surpassing their upcoming quarterly earnings estimates.

Key Decisions for Investors

• Investors could consider utilizing the described Earnings ESP framework as a quantitative screen to identify potential pre-earnings long opportunities, given its compelling back-tested performance of predicting positive surprises.
• For Texas Roadhouse (TXRH), the combination of a #2 (Buy) rank and a strong +3.34% ESP suggests a higher probability of an earnings beat, making it a candidate for a tactical bullish position ahead of its July 25 report.
• While Ulta Beauty (ULTA) also has a positive ESP of +0.74%, its #3 (Hold) rank implies an in-line market performance, suggesting investors should monitor for any further positive estimate revisions before establishing a significant position.
• Despite the strong historical returns cited, investors should recognize that this is a probabilistic model and past performance is not indicative of future results, warranting prudent risk management and position sizing.