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

Zacks highlights its Earnings ESP tool as a way to identify likely earnings surprises by comparing the Most Accurate Estimate to the Zacks Consensus. Recursion Pharmaceuticals (RXRX) is flagged with a Zacks Rank #2 (Buy), a Most Accurate EPS of -$0.33 and an ESP of +8.02% ahead of an August 13, 2024 report, while Amgen (AMGN) carries a Rank #3 (Hold), a Most Accurate EPS of $4.98 and an ESP of +2.25% before an August 6, 2024 release. Zacks notes that a positive ESP combined with a Zacks Rank of #3 or better historically produced positive surprises 70% of the time and delivered a 28.3% annual return in a 10-year backtest, implying these names could be positioned to beat consensus estimates.

Analysis

Market structure: Positive Zacks ESPs (RXRX +8.02%, AMGN +2.25%) bias near-term upside probability but operate in different market niches — RXRX (small-cap biotech) is binary and benefits short-term from positive estimate revisions and risk-on flows; AMGN (large-cap biotech/pharma) benefits from defensive rotation into dividend-bearing, cash-generative pharma. Positive beats will reallocate active manager weights from speculative small-cap biotechs into high-conviction large caps, tightening demand for AMGN shares and expanding RXRX option skew and realized volatility. Bond markets: a sizeable biotech rally nudges risk-on, compressing IG credit spreads by ~5–15bp; FX: USD may soften modestly on sustained risk-on.

Risk assessment: Tail risks include RXRX trial failure or unexpected negative guidance that can cause >50% gap declines; AMGN faces regulatory setbacks or margin pressure from biosimilar competition that could knock 10–20% off forward multiple over quarters. Immediate (days) risk is earnings binary and IV spikes; short-term (weeks) is post-earnings drift and sentiment reversal; long-term (quarters) risks are pipeline readouts, FDA actions, and reimbursement shifts. Hidden dependencies: analyst "Most Accurate" estimates often reflect handful of analysts — ESPs can be noisy when coverage is thin, so probability of false positive for small names is materially higher.

Trade implications: For RXRX, prefer defined-risk directional exposure via call spreads or long-dated LEAPs sized 0.5–2% portfolio because single-event binary can move >30–100% in days; sell premium (short calls) after any sharp pop to capture IV premium. For AMGN, a modest long (1–3%) in shares or buy-write around earnings captures stable cash flow upside and dividend yield; consider pair trade long AMGN vs short small-cap biotech ETF (XBI/IBB) to express defensive overweight. Options: implement 30–60 day calendars or debit call spreads ahead of earnings for RXRX to cap loss; write covered calls on AMGN post-earnings to harvest income.

Contrarian angles: The consensus overweights ESP as a signal without adjusting for coverage breadth — RXRX's +8% ESP may be from a single analyst and therefore overstates beat probability; market may underreact to small positive beats for AMGN because expectations are already high, creating a 3–7% short-term mispricing opportunity. Historical parallel: small-cap biotech with positive pre-earnings estimate revisions often gap up 20–60% then mean-revert 20–40% within 3 months absent fundamental catalysts. Unintended consequence: aggressive long positioning in RXRX ahead of earnings can force forced-liquidations in a negative surprise, amplifying downside volatility beyond fundamentals.

Key Decisions for Investors

• Establish a defined-risk bullish RXRX position sized 0.5–1.5% of portfolio via a 30–45 day debit call spread (max loss = premium). Target a 40–80% gain to take profits; cut losses at 100% of premium or if pre-market news shows trial/regulatory negative headline.
• Initiate a 1–2% core position in AMGN shares ahead of the August earnings window (or equivalent via 30–60 day ATM calls) and plan to sell covered calls (30–45 day, ~10% OTM) post-earnings to harvest yield if share price rallies <8%.
• Construct a pair trade: long AMGN (1% eq) vs short XBI or IBB (1% eq) to express defensive preference; rebalance if relative performance diverges >5% or after earnings movement >3%.
• For all biotech exposure, require catalysts checklist: verify number of analysts contributing to "Most Accurate" estimate, upcoming FDA/calendar events within 30–60 days, and short interest change >5 percentage points before adding exposure — if any fail, reduce size by 50%.