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

The article introduces the Zacks Earnings ESP (Expected Surprise Prediction) tool, which identifies potential earnings beats by comparing the most accurate analyst estimates to the Zacks Consensus Estimate. Historically, combining a positive ESP with a Zacks Rank #3 (Hold) or better has predicted a positive earnings surprise 70% of the time, yielding average annual returns of 28.3% over a 10-year backtest. Ralph Lauren (RL) and Royal Caribbean (RCL) are cited as current examples exhibiting positive ESPs, suggesting potential for upside surprises in their upcoming earnings reports.

Analysis

The article presents a quantitative strategy for identifying potential earnings surprises using the Zacks Expected Surprise Prediction (ESP) model. This methodology posits that the most recent analyst revisions are more predictive of earnings outcomes. The model's efficacy is supported by a 10-year backtest, which reportedly shows that stocks with a positive ESP and a Zacks Rank of #3 (Hold) or better delivered a positive earnings surprise 70% of the time, generating average annual returns of 28.3%. Two specific applications are highlighted: Ralph Lauren (RL) and Royal Caribbean (RCL). Ralph Lauren, with a Zacks Rank #3 (Hold), exhibits a positive ESP of +0.56% just 12 days ahead of its August 7, 2024 earnings report, positioning it as a near-term candidate for a potential beat. Royal Caribbean, holding a stronger Zacks Rank #2 (Buy), also has a positive ESP of +0.51%. However, its earnings report is 90 days out (October 24, 2024), making the signal less timely and more subject to change compared to RL, as the model's premise relies on the recency of analyst revisions.

Key Decisions for Investors

• Investors could utilize the Zacks ESP as a quantitative screening tool to identify potential short-term, catalyst-driven trades around earnings announcements, particularly for stocks with a positive ESP and a Zacks Rank of #3 or better.
• For Ralph Lauren (RL), the combination of a positive ESP (+0.56%) and the close proximity of its August 7th earnings date suggests a statistically significant probability of an earnings beat, warranting close monitoring for a potential tactical long position.
• While Royal Caribbean (RCL) also shows a positive ESP (+0.51%), the 90-day lead time to its report means the signal is preliminary; it is prudent to monitor for changes in its Most Accurate Estimate closer to the October 24th date to confirm the signal's strength.
• This signal should be treated as a single data point; a robust investment decision would require integrating this quantitative earnings surprise indicator with a broader fundamental analysis of each company and the consumer discretionary sector.