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.

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 #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 Block?

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. Block (SQ Quick QuoteSQ - Free Report) earns a #3 (Hold) right now and its Most Accurate Estimate sits at $0.83 a share, just six days from its upcoming earnings release on August 1, 2024.

Block's Earnings ESP sits at +9.93%, which, as explained above, is calculated by taking the percentage difference between the $0.83 Most Accurate Estimate and the Zacks Consensus Estimate of $0.76. SQ 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.

SQ is part of a big group of Business Services stocks that boast a positive ESP, and investors may want to take a look at Seagate (STX Quick QuoteSTX - Free Report) as well.

Seagate, which is readying to report earnings on October 24, 2024, sits at a Zacks Rank #1 (Strong Buy) right now. It's Most Accurate Estimate is currently $1.56 a share, and STX is 90 days out from its next earnings report.

The Zacks Consensus Estimate for Seagate is $1.21, and when you take the percentage difference between that number and its Most Accurate Estimate, you get the Earnings ESP figure of +28.73%.

Because both stocks hold a positive Earnings ESP, SQ and STX 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 >>