Want Better Returns? Don't Ignore These 2 Finance Stocks Set to Beat Earnings

Zacks outlines its Earnings ESP (Expected Surprise Prediction) which measures the percentage difference between the Most Accurate (most recent) estimate and the Zacks Consensus Estimate to identify likely quarterly earnings beats. Zacks reports that a positive ESP combined with a Zacks Rank of #3 or better historically produced positive bottom-line surprises 70% of the time and a roughly 28% annual return in a 10-year backtest. Two examples: Progressive (PGR) is a Zacks #3 with a Most Accurate Estimate of $2.55 vs. consensus $2.51 (ESP +1.28%), due July 11, 2024; EPR Properties (EPR) is a Zacks #3 with Most Accurate $1.21 vs. consensus $1.19 (ESP +0.98%), due August 7, 2024. The piece positions positive ESP readings as signals for potential near-term stock upside ahead of earnings releases.

Analysis

Market structure: Positive Earnings ESP readings (PGR +1.28%, EPR +0.98%) primarily benefit short-term equity holders, options buyers, and quant signals that trade earnings drift; PGR (auto P&C) gains pricing power if underwriting and investment income beat, EPR (specialty REIT) benefits if same-store NOI and occupancy surprise. Losers: volatility sellers and long-duration REIT holders if rates re-price; expect IV to rise 20–60% into reports, modest ripple into IG credit and 2–10y Treasury yields if surprises change 2H rate expectations.

Risk assessment: Tail risks include a large catastrophe (hurricane) or adverse reserve development for PGR, regulatory rate caps for auto, and a sharp upward move in 10y yields >50bp that would compress EPR NAV; low-probability large-loss scenarios could swing stock +/-20–40% within weeks. Time horizons: immediate (days) dominated by IV and earnings print, short-term (weeks–months) driven by post-earnings drift and rate moves, long-term (quarters) tied to underwriting cycles and Fed path. Monitor reinsurance pricing, loss ratio revisions, and 10y Treasury moves as hidden dependencies.

Trade implications: Direct: establish a tactical 2–3% long in PGR ahead of 11-Jul-2024 using a 30–45 day near-the-money call spread (delta ~0.45–0.55) to cap premium; smaller 1–1.5% exposure in EPR ahead of 7-Aug-2024 with a 60–90 day call or buy-write to capture dividend. Pair: long PGR / short TRV (equal dollar, delta-hedged) to isolate EPS surprise vs peer. Options: prefer verticals over naked calls if IV > 25% above 90-day realized; sell OTM puts only if willing to own at 5–10% lower than current price.

Contrarian angles: The consensus edge is overstated — ESPs under 2% are within analyst noise and often reverse post-guidance; market may be underpricing EPR downside to rates, so long REIT bets should be capped and hedged if 10y>3.5%. Historical parallels: small positive ESPs in insurance have preceded both strong beats and big reserve shocks; size positions conservatively (1–3%) and require a clear post-earnings follow-through within 2–6 weeks before scaling.

Key Decisions for Investors

• Consider establishing a 2–3% long position in PGR ahead of the 11-Jul-2024 report via a 30–45 day near-the-money call spread (target delta 0.45–0.55) to capture expected positive surprise while limiting premium risk; exit or reassess within 3 trading days after print, or if implied vol jumps >40% above 30-day realized.
• Allocate 1–1.5% to EPR before the 7-Aug-2024 report using a 60–90 day call or a buy-write to capture dividend upside, but hedge duration by buying a 10y Treasury 5–10bp steepener or put on the sector if 10y Treasury yield rises >25bp pre-earnings.
• Implement a relative-value pair trade: long PGR and short TRV equal-dollar (each 0.5–1% of portfolio), delta-hedged, to isolate underwriting/earnings surprise; close within 2–6 weeks post-earnings or when spread moves >6% in either direction.
• Risk control: avoid naked option buys if implied volatility >20–30% premium to 90-day realized vol; instead use debit call spreads or reduce position size to 1% and buy 2–3% notional hedges (OTM puts) on P&C insurers if catastrophe indices or loss ratio revisions appear in the next 30 days.