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 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.

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 #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 Eaton?

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. Eaton (ETN Quick QuoteETN - Free Report) earns a #3 (Hold) right now and its Most Accurate Estimate sits at $2.62 a share, just 22 days from its upcoming earnings release on August 6, 2024.

ETN has an Earnings ESP figure of +0.42%, which, as explained above, is calculated by taking the percentage difference between the $2.62 Most Accurate Estimate and the Zacks Consensus Estimate of $2.61. Eaton 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.

ETN is part of a big group of Industrial Products stocks that boast a positive ESP, and investors may want to take a look at Plug Power (PLUG Quick QuotePLUG - Free Report) as well.

Slated to report earnings on August 14, 2024, Plug Power holds a #3 (Hold) ranking on the Zacks Rank, and it's Most Accurate Estimate is -$0.30 a share 30 days from its next quarterly update.

Plug Power's Earnings ESP figure currently stands at +0.66% after taking the percentage difference between its Most Accurate Estimate and its Zacks Consensus Estimate of -$0.30.

ETN and PLUG'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 >>