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.

The earnings figure itself is key, of course, but a beat or miss on the bottom line can sometimes be just as, if not more, important. Therefore, investors should consider paying close attention to these earnings surprises, as a big beat can help a stock climb and vice versa.

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.

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 #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 Emerson Electric?

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. Emerson Electric (EMR Quick QuoteEMR - Free Report) earns a #3 (Hold) right now and its Most Accurate Estimate sits at $1.45 a share, just 29 days from its upcoming earnings release on August 7, 2024.

Emerson Electric's Earnings ESP sits at +2.23%, which, as explained above, is calculated by taking the percentage difference between the $1.45 Most Accurate Estimate and the Zacks Consensus Estimate of $1.42. EMR is also part of a large group of stocks that boast a positive ESP. Make sure to utilize our Earnings ESP Filter to uncover the best stocks to buy or sell before they've reported.

EMR is part of a big group of Industrial Products stocks that boast a positive ESP, and investors may want to take a look at Stanley Black & Decker (SWK Quick QuoteSWK - Free Report) as well.

Stanley Black & Decker is a Zacks Rank #3 (Hold) stock, and is getting ready to report earnings on July 30, 2024. SWK's Most Accurate Estimate sits at $0.85 a share 21 days from its next earnings release.

The Zacks Consensus Estimate for Stanley Black & Decker is $0.84, and when you take the percentage difference between that number and its Most Accurate Estimate, you get the Earnings ESP figure of +0.56%.

EMR and SWK'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 >>