Two factors often determine stock prices in the long run: earnings and interest rates. Investors can't control the latter, but they can focus on a company's earnings results every quarter.
We know earnings results are vital, but how a company performs compared to bottom line expectations can be even more important when it comes to stock prices, especially in the near-term. This means that investors might want to take advantage of these earnings surprises.
Now that we know how important earnings and earnings surprises are, it's time to show investors how to take advantage of these events to boost their returns by utilizing the Zacks Earnings ESP filter.
The Zacks Earnings ESP, Explained
The Zacks Earnings ESP, or Expected Surprise Prediction, aims to find earnings surprises by focusing on the most recent analyst revisions. The basic premise is that if an analyst reevaluates their earnings estimate ahead of an earnings release, it means they likely have new information that could possibly be more accurate.
Now that we understand the basic idea, let's look at how the Expected Surprise Prediction works. The ESP is calculated by comparing the Most Accurate Estimate to the Zacks Consensus Estimate, with the percentage difference between the two giving us the Zacks ESP figure.
When we join a positive earnings ESP with a Zacks Rank #3 (Hold) or stronger, stocks posted a positive bottom-line surprise 70% of the time. Plus, this system saw investors produce roughly 28% annual returns on average, according to our 10 year backtest.
Most stocks, about 60%, fall into the #3 (Hold) category, and they are expected to perform in-line with the broader market. Stocks with a #2 (Buy) and #1 (Strong Buy) rating, or the top 15% and top 5% of stocks, respectively, should outperform the market, with Strong Buy stocks outperforming more than any other rank.
Should You Consider SM Energy?
The final step today is to look at a stock that meets our ESP qualifications. SM Energy (SM) earns a #3 (Hold) 30 days from its next quarterly earnings release on July 30, 2026, and its Most Accurate Estimate comes in at $1.96 a share.
SM has an Earnings ESP figure of +4.81%, which, as explained above, is calculated by taking the percentage difference between the $1.96 Most Accurate Estimate and the Zacks Consensus Estimate of $1.87. SM Energy is one of a large database of stocks with positive ESPs. Make sure to utilize our Earnings ESP Filter to uncover the best stocks to buy or sell before they've reported.
SM is part of a big group of Oils and Energy stocks that boast a positive ESP, and investors may want to take a look at Diamondback Energy (FANG) as well.
Diamondback Energy, which is readying to report earnings on August 3, 2026, sits at a Zacks Rank #3 (Hold) right now. Its Most Accurate Estimate is currently $5.89 a share, and FANG is 34 days out from its next earnings report.
For Diamondback Energy, the percentage difference between its Most Accurate Estimate and its Zacks Consensus Estimate of $5.65 is +4.25%.
Because both stocks hold a positive Earnings ESP, SM and FANG could potentially post earnings beats in their next reports.
Find Stocks to Buy or Sell Before They're Reported
Use the Zacks Earnings ESP Filter to turn up stocks with the highest probability of positively, or negatively, surprising to buy or sell before they're reported for profitable earnings season trading. Check it out here >>
Should You Invest in SM Energy Company (SM)?
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SM Energy Company (SM): Free Stock Analysis Report
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This article originally published on Zacks Investment Research (zacks.com).