These 2 Utilities Stocks Could Beat Earnings: Why They Should Be on Your Radar

Zacks Investment Research highlights its proprietary Earnings ESP (Expected Surprise Prediction) tool, which, when combined with a Zacks Rank #3 (Hold) or better, has historically identified stocks likely to deliver positive earnings surprises 70% of the time. This methodology, which compares the most accurate analyst estimate to the consensus, has demonstrated average annual returns of 28.3% over a 10-year backtest. The article cites Entergy (ETR) with a +4.23% ESP and NRG Energy (NRG) with a +5.18% ESP, both holding a Zacks Rank #3, as examples of utilities stocks poised for potential earnings beats.

Analysis

The analysis centers on a quantitative strategy for identifying potential earnings beats, specifically the Zacks Earnings ESP (Expected Surprise Prediction) model. This model identifies divergence between the most recent analyst revisions (the 'Most Accurate Estimate') and the broader consensus. According to the provided 10-year backtest, a positive ESP combined with a Zacks Rank of #3 (Hold) or better has historically resulted in a positive earnings surprise 70% of the time, yielding average annual returns of 28.3%. Two utility stocks are highlighted as fitting this criteria: Entergy (ETR) and NRG Energy (NRG). Entergy shows a positive ESP of +4.23%, derived from a Most Accurate Estimate of $1.38 per share versus a consensus of $1.32. Similarly, NRG Energy exhibits a positive ESP of +5.18%, with its Most Accurate Estimate at $2.03 against a consensus of $1.93. Despite these positive short-term indicators for an earnings beat, both companies currently hold a Zacks Rank #3 (Hold), which signifies an expectation of in-line market performance, tempering the otherwise bullish signal.

Key Decisions for Investors

• Investors focused on short-term event-driven strategies could consider tactical long positions in ETR and NRG leading into their respective earnings reports to capitalize on the high statistical probability of an earnings beat indicated by their positive ESPs.
• Long-term investors should note that while a potential earnings beat is a positive catalyst, the 'Hold' rating on both stocks suggests market expectations are neutral, warranting a deeper analysis of company fundamentals before altering a core holding.
• Traders utilizing this signal should recognize it is based on a proprietary quantitative model; the backtested returns are not a guarantee, and the neutral 'Hold' rating may limit the magnitude of any post-earnings stock price appreciation.