Wall Street watches a company's quarterly report closely to understand as much as possible about its recent performance and what to expect going forward. Of course, one figure often stands out among the rest: earnings.

Life and the stock market are both about expectations, and rising above what is expected is often rewarded, while falling short can come with negative consequences. Investors might want to try to capture stronger returns by finding positive 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 Expected Surprise Prediction, or ESP, works by locking in on the most up-to-date analyst earnings revisions because they can be more accurate than estimates from weeks or even months before the actual release date. The thinking is pretty straightforward: analysts who provide earnings estimates closer to the report are likely to have more information.

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.

Bringing together a positive earnings ESP alongside a Zacks Rank #3 (Hold) or better has helped stocks report a positive earnings surprise 70% of the time. Furthermore, by using these parameters, investors have seen 28.3% annual returns on average, according to our 10 year backtest.

Stocks with a #3 (Hold) ranking, which is most stocks covered at 60%, are expected to perform in-line with the broader market. But stocks that fall into the #2 (Buy) and #1 (Strong Buy) ranking, or the top 15% and top 5% of stocks, respectively, should outperform the market. Strong Buy stocks should outperform more than any other rank.

Should You Consider Lithium Americas Corp.

Now that we understand what the ESP is and how beneficial it can be, let's dive into a stock that currently fits the bill. Lithium Americas Corp. (LAC Quick QuoteLAC - Free Report) earns a #3 (Hold) right now and its Most Accurate Estimate sits at -$0.07 a share, just 29 days from its upcoming earnings release on July 27, 2023.

By taking the percentage difference between the -$0.07 Most Accurate Estimate and the -$0.14 Zacks Consensus Estimate, Lithium Americas Corp. has an Earnings ESP of +48.78%. Investors should also know that LAC is one of a large group 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.

LAC is part of a big group of Basic Materials stocks that boast a positive ESP, and investors may want to take a look at Franco-Nevada (FNV Quick QuoteFNV - Free Report) as well.

Slated to report earnings on August 9, 2023, Franco-Nevada holds a #3 (Hold) ranking on the Zacks Rank, and it's Most Accurate Estimate is $0.97 a share 42 days from its next quarterly update.

For Franco-Nevada, the percentage difference between its Most Accurate Estimate and its Zacks Consensus Estimate of $0.90 is +7.78%.

LAC and FNV's positive ESP figures tell us that both stocks have a good chance at beating analyst expectations in their next earnings report.

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 >>