How to Find Strong Finance Stocks Slated for Positive Earnings Surprises

Zacks highlights its Earnings ESP (Expected Surprise Prediction) tool, designed to identify potential earnings surprises by comparing the Most Accurate Estimate to the Zacks Consensus Estimate. When combined with a Zacks Rank #3 (Hold) or better, this methodology has historically predicted positive surprises 70% of the time and generated 28.3% average annual returns over a 10-year backtest. The article cites Morgan Stanley (MS) and Palomar (PLMR) as current examples with positive ESPs and strong Zacks Ranks, indicating potential upcoming positive earnings surprises for investors to consider.

Analysis

The analysis from Zacks presents a quantitative strategy centered on its proprietary Earnings ESP (Expected Surprise Prediction) model, designed to identify stocks with a high probability of delivering a positive earnings surprise. The methodology's core premise is that recent upward analyst revisions, captured in the 'Most Accurate Estimate,' are a leading indicator of an upcoming earnings beat. According to Zacks' 10-year backtest, combining a positive Earnings ESP with a Zacks Rank of #3 (Hold) or better has historically predicted positive surprises 70% of the time and generated average annual returns of 28.3%. The report highlights two specific securities that currently fit this bullish profile: Morgan Stanley (MS) and Palomar (PLMR). Morgan Stanley holds a #1 (Strong Buy) rating and a positive Earnings ESP of +3.5%, based on a Most Accurate Estimate of $1.72 versus a consensus of $1.66 ahead of its July 16 report. Similarly, Palomar, also rated #1 (Strong Buy), exhibits a positive ESP of +0.45% leading into its August 7 earnings release. The explicit flagging of these two financial stocks suggests they are quantitatively positioned for potential upside volatility post-earnings, according to the described model.

Key Decisions for Investors

• Investors with an event-driven or short-term tactical focus might consider initiating or adding to positions in Morgan Stanley (MS) and Palomar (PLMR) ahead of their upcoming earnings reports to capitalize on the potential for a positive surprise and subsequent price appreciation.
• While the backtested 70% success rate and 28.3% average annual returns are compelling, these are historical metrics and not guarantees of future performance; positions should be sized appropriately to account for the inherent binary risk of an earnings announcement.
• Beyond these specific tickers, investors could integrate the Zacks Earnings ESP filter as a quantitative screening tool to systematically identify other potential earnings-beat candidates across their portfolio and watchlist.