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

The article introduces the Zacks Earnings ESP (Expected Surprise Prediction) as a proprietary tool designed to identify stocks likely to exceed consensus earnings estimates. This metric compares the Most Accurate Estimate to the Zacks Consensus Estimate, factoring in the Zacks Rank to pinpoint potential surprises. A 10-year backtest demonstrated that stocks with a positive ESP and a Zacks Rank #3 (Hold) or stronger delivered positive bottom-line surprises 70% of the time, generating average annual returns of 28%, suggesting a robust strategy for investors seeking to capitalize on earnings season opportunities.

Analysis

The provided text outlines a quantitative strategy centered on the Zacks Earnings ESP (Expected Surprise Prediction) model, designed to identify companies likely to exceed earnings consensus. The model's core logic is that earnings estimate revisions made closer to a report date are more informed and thus more accurate. It quantifies this by calculating the percentage difference between the 'Most Accurate Estimate' and the broader 'Zacks Consensus Estimate'. According to a 10-year backtest cited in the article, combining a positive Earnings ESP with a Zacks Rank of #3 (Hold) or better has historically resulted in a positive earnings surprise 70% of the time, generating average annual returns of 28%. The article highlights two specific applications of this model. Palomar (PLMR), with a Zacks Rank #2 (Buy), shows a positive ESP of +3% based on a Most Accurate Estimate of $1.15 versus a consensus of $1.11 ahead of its August 7 report. Similarly, Royalty Pharma (RPRX), rated #3 (Hold), has a positive ESP of +1.41% ($0.96 Most Accurate vs. $0.95 consensus) before its August 13 report. These metrics, supported by bullish per-ticker sentiment scores of 0.7 for PLMR and 0.6 for RPRX, suggest both companies have a statistically significant probability of beating their upcoming bottom-line estimates.

Key Decisions for Investors

• Investors employing event-driven strategies should consider utilizing the Zacks Earnings ESP filter to screen for potential pre-earnings long opportunities, given its strong historical backtest performance.
• Palomar (PLMR) presents a compelling short-term bullish case, as its combination of a #2 (Buy) rank and a +3% ESP signals a high probability of an earnings beat on August 7, which could serve as a positive catalyst for the stock.
• Royalty Pharma (RPRX) also warrants consideration for a tactical long position ahead of its August 13 report, though its #3 (Hold) rank suggests it may be a slightly higher-risk play compared to PLMR, despite its positive +1.41% ESP.
• Monitor any changes to the 'Most Accurate Estimate' for both PLMR and RPRX as their report dates approach, as shifts in this key metric would directly impact the ESP calculation and the validity of the trade thesis.