These 2 Oils and Energy Stocks Could Beat Earnings: Why They Should Be on Your Radar

The article introduces the Zacks Earnings ESP (Expected Surprise Prediction) tool, a methodology designed to identify companies likely to post positive earnings surprises. This tool operates by comparing the 'Most Accurate Estimate' from recent analyst revisions with the broader 'Zacks Consensus Estimate.' Historically, combining a positive Earnings ESP with a Zacks Rank of #3 (Hold) or better has led to positive surprises 70% of the time, generating an average annual return of 28.3% over a 10-year backtest. Current examples cited include Plains All American Pipeline (PAA) and Energy Transfer LP (ET), both showing positive ESPs and strong Zacks Ranks, suggesting potential earnings beats.

Analysis

The Zacks Earnings ESP model is presented as a quantitative tool for identifying potential earnings surprises by focusing on the most recent analyst revisions. The methodology's core thesis is that analysts who revise estimates closer to an earnings release possess more accurate, timely information. By comparing the 'Most Accurate Estimate' to the 'Zacks Consensus Estimate,' the model generates an 'Expected Surprise Prediction' (ESP). According to a 10-year backtest provided in the article, combining a positive Earnings ESP with a Zacks Rank of #3 (Hold) or better has historically yielded a positive earnings surprise 70% of the time, leading to an average annual return of 28.3%. The analysis highlights two specific energy-sector stocks as current examples of this model in action: Plains All American Pipeline (PAA) and Energy Transfer LP (ET). PAA holds a #1 (Strong Buy) rank with a +6.06% Earnings ESP, stemming from a Most Accurate Estimate of $0.35 versus a consensus of $0.33. Similarly, ET holds a #2 (Buy) rank with a significant +17.32% Earnings ESP, based on a Most Accurate Estimate of $0.42 against a consensus of $0.36. Both companies are positioned as having a high probability of beating their upcoming earnings estimates in early August 2024.

Key Decisions for Investors

• Given their strong Zacks Ranks and positive Earnings ESP figures of +6.06% and +17.32% respectively, investors could consider tactical long positions in Plains All American Pipeline (PAA) and Energy Transfer LP (ET) ahead of their earnings reports in early August.
• Traders focused on earnings season could systematically utilize the Zacks Earnings ESP filter to identify other potential earnings-beat candidates by screening for stocks with both a positive ESP and a Zacks Rank of #3 or better.
• While the historical data is compelling, an earnings beat does not guarantee a positive stock reaction; investors should monitor post-release price action and management guidance, as broader energy market sentiment will also influence performance.