These 2 Computer and Technology Stocks Could Beat Earnings: Why They Should Be on Your Radar

The article details the Zacks Earnings ESP (Expected Surprise Prediction) tool, which forecasts earnings surprises by comparing the Most Accurate Estimate to the Zacks Consensus Estimate, leveraging recent analyst revisions. Historically, combining a positive ESP with a Zacks Rank #3 (Hold) or better has yielded positive earnings surprises 70% of the time, leading to average annual returns of 28.3% over a 10-year backtest. This methodology is presented as a means for investors to identify stocks, such as current examples Paycom Software (PAYC) and Badger Meter (BMI), that are poised for positive earnings surprises, offering a potential trading advantage.

Analysis

The provided intelligence centers on the Zacks Earnings ESP (Expected Surprise Prediction) methodology, a quantitative tool designed to forecast earnings surprises by identifying recent upward revisions from analysts. The model's core premise is that the 'Most Accurate Estimate' provides a more timely and potentially more precise earnings forecast than the broader 'Zacks Consensus Estimate'. According to the firm's 10-year backtest, combining a positive ESP with a Zacks Rank of #3 (Hold) or better has historically predicted a positive earnings surprise 70% of the time, generating an average annual return of 28.3%. The analysis highlights two current applications of this model: Paycom Software (PAYC) and Badger Meter (BMI). Paycom holds a #1 (Strong Buy) rating and exhibits a substantial ESP of +9.11%, calculated from a Most Accurate Estimate of $1.73 versus a consensus of $1.59, ahead of its August 6, 2024 earnings. Similarly, Badger Meter, rated #2 (Buy), has a positive ESP of +1.18% based on estimates of $0.99 versus $0.98 for its July 19, 2024 report. These specific data points suggest that, according to this proprietary model, both technology-sector companies are positioned for potential upside surprises in their upcoming quarterly results.

Key Decisions for Investors

• Given its #1 (Strong Buy) rating and a significant +9.11% Earnings ESP, investors might consider Paycom Software (PAYC) for a tactical position ahead of its August 6 earnings report, as the model suggests a high probability of a positive surprise.
• Badger Meter (BMI) offers a more immediate opportunity with its July 19 earnings date, and while its positive ESP of +1.18% is also a bullish signal, it suggests a potentially more modest upside relative to PAYC.
• While the historical backtest results are compelling, the ESP model should be treated as a probabilistic indicator rather than a guarantee; positions should be sized appropriately to manage the inherent volatility associated with trading around earnings releases.
• Investors could utilize the described ESP filter to screen for a broader portfolio of potential earnings surprise candidates, thereby diversifying single-stock event risk across multiple opportunities.