How to Find Strong Consumer Discretionary Stocks Slated for Positive Earnings Surprises

The article details the Zacks Earnings ESP (Expected Surprise Prediction) tool, which forecasts earnings surprises by comparing the Most Accurate Estimate (latest analyst revision) against the Zacks Consensus Estimate. When combined with a Zacks Rank #3 (Hold) or stronger, this system has historically predicted positive earnings surprises 70% of the time and delivered average annual returns of 28% over a 10-year backtest. Lululemon (LULU) and Roku (ROKU) are cited as current examples with positive ESPs, indicating a potential for them to beat their upcoming earnings estimates, offering investors a method to identify profitable trading opportunities during earnings season.

Analysis

The Zacks Earnings ESP (Expected Surprise Prediction) methodology is presented as a quantitative tool for identifying potential earnings beats by prioritizing the most recent analyst revisions. The core thesis is that analysts adjusting estimates closer to an earnings report possess more accurate, timely information. This model's efficacy is supported by a 10-year backtest showing that stocks with a positive ESP and a Zacks Rank of #3 (Hold) or better delivered a positive earnings surprise 70% of the time, generating average annual returns of approximately 28%. Two specific companies are highlighted as qualifying under this model. Lululemon (LULU), with a Zacks Rank #3, exhibits a positive ESP of +0.55% based on its Most Accurate Estimate of $2.40 per share versus a consensus of $2.39 ahead of its June 5 earnings report. Similarly, Roku (ROKU), also a Zacks Rank #3, shows a more significant positive ESP of +8.66%, with its Most Accurate Estimate at -$0.41 compared to a consensus of -$0.45 for its July 25 report. Based on this specific quantitative screen, both companies are flagged as having a statistical likelihood of surpassing their respective quarterly earnings estimates.

Key Decisions for Investors

• Given Lululemon's positive Earnings ESP of +0.55% and its imminent earnings release on June 5, investors may consider this a short-term bullish indicator for a potential post-earnings price increase.
• For Roku, the significantly higher ESP of +8.66% suggests stronger positive revisions from analysts, making it a candidate for watchlists ahead of its late-July earnings report, though the 55-day lead time warrants monitoring for any changes in estimates.
• Traders focused on earnings season could consider integrating the Zacks ESP metric, specifically the combination of a positive ESP and a Zacks Rank of #3 or better, as a systematic filter to identify potential long or short opportunities before companies report.