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.

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.

In fact, when we combined a Zacks Rank #3 (Hold) or better and a positive Earnings ESP, stocks produced a positive surprise 70% of the time. Perhaps most importantly, using these parameters has helped produce 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 Devon Energy?

The last thing we will do today, now that we have a grasp on the ESP and how powerful of a tool it can be, is to quickly look at a qualifying stock. Devon Energy (DVN Quick QuoteDVN - Free Report) holds a #3 (Hold) at the moment and its Most Accurate Estimate comes in at $1.34 a share 28 days away from its upcoming earnings release on August 6, 2024.

DVN has an Earnings ESP figure of +4.18%, which, as explained above, is calculated by taking the percentage difference between the $1.34 Most Accurate Estimate and the Zacks Consensus Estimate of $1.28. Devon 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.

DVN 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 First Solar (FSLR Quick QuoteFSLR - Free Report) as well.

First Solar, which is readying to report earnings on July 30, 2024, sits at a Zacks Rank #3 (Hold) right now. It's Most Accurate Estimate is currently $2.81 a share, and FSLR is 21 days out from its next earnings report.

First Solar's Earnings ESP figure currently stands at +4.75% after taking the percentage difference between its Most Accurate Estimate and its Zacks Consensus Estimate of $2.69.

DVN and FSLR'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 >>