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.

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.

The core of the ESP model is comparing the Most Accurate Estimate to the Zacks Consensus Estimate, where the resulting percentage difference between the two equals the Expected Surprise Prediction. The Zacks Rank is also factored into the ESP metric to better help find companies that appear poised to top their next bottom-line consensus estimate, which will hopefully help lift the stock price.

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.

Stocks with a ranking of #3 (Hold), or 60% of all stocks covered by the Zacks Rank, are expected to perform in-line with the broader market. Stocks with rankings of #2 (Buy) and #1 (Strong Buy), 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 Fastly?

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. Fastly (FSLY Quick QuoteFSLY - Free Report) earns a #3 (Hold) right now and its Most Accurate Estimate sits at -$0.06 a share, just 21 days from its upcoming earnings release on November 1, 2023.

By taking the percentage difference between the -$0.06 Most Accurate Estimate and the -$0.07 Zacks Consensus Estimate, Fastly has an Earnings ESP of +17.24%. Investors should also know that FSLY 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.

FSLY is one of just a large database of Computer and Technology stocks with positive ESPs. Another solid-looking stock is Splunk .

Slated to report earnings on November 29, 2023, Splunk holds a #1 (Strong Buy) ranking on the Zacks Rank, and it's Most Accurate Estimate is $1.14 a share 49 days from its next quarterly update.

The Zacks Consensus Estimate for Splunk is $1.12, and when you take the percentage difference between that number and its Most Accurate Estimate, you get the Earnings ESP figure of +2.17%.

FSLY and SPLK'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 >>