Quarterly financial reports play a vital role on Wall Street, as they help investors see how a company has performed and what might be coming down the road in the near-term. And out of all of the metrics and results to consider, earnings is one of the most important.

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.

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 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 Stanley Black & Decker?

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. Stanley Black & Decker (SWK Quick QuoteSWK - Free Report) earns a #3 (Hold) right now and its Most Accurate Estimate sits at $0.55 a share, just 28 days from its upcoming earnings release on May 2, 2024.

By taking the percentage difference between the $0.55 Most Accurate Estimate and the $0.54 Zacks Consensus Estimate, Stanley Black & Decker has an Earnings ESP of +0.85%. Investors should also know that SWK 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.

SWK is one of just a large database of Industrial Products stocks with positive ESPs. Another solid-looking stock is Caterpillar (CAT Quick QuoteCAT - Free Report) .

Caterpillar is a Zacks Rank #2 (Buy) stock, and is getting ready to report earnings on April 25, 2024. CAT's Most Accurate Estimate sits at $5.18 a share 21 days from its next earnings release.

The Zacks Consensus Estimate for Caterpillar is $5.11, and when you take the percentage difference between that number and its Most Accurate Estimate, you get the Earnings ESP figure of +1.29%.

SWK and CAT's positive ESP metrics may signal that a positive earnings surprise for both stocks is on the horizon.

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 >>