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.

The ability to identify stocks that are likely to top quarterly earnings expectations can be profitable, but it's no simple task. Here at Zacks, our Earnings ESP filter helps make things easier.

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.

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.

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 Carvana?

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. Carvana (CVNA Quick QuoteCVNA - Free Report) earns a #2 (Buy) right now and its Most Accurate Estimate sits at $0.07 a share, just 30 days from its upcoming earnings release on July 17, 2024.

CVNA has an Earnings ESP figure of +367.64%, which, as explained above, is calculated by taking the percentage difference between the $0.07 Most Accurate Estimate and the Zacks Consensus Estimate of -$0.02. Carvana 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.

CVNA is part of a big group of Retail and Wholesale stocks that boast a positive ESP, and investors may want to take a look at Alibaba (BABA Quick QuoteBABA - Free Report) as well.

Slated to report earnings on August 8, 2024, Alibaba holds a #3 (Hold) ranking on the Zacks Rank, and it's Most Accurate Estimate is $2.37 a share 52 days from its next quarterly update.

Alibaba's Earnings ESP figure currently stands at +5.74% after taking the percentage difference between its Most Accurate Estimate and its Zacks Consensus Estimate of $2.24.

Because both stocks hold a positive Earnings ESP, CVNA and BABA 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 >>