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.

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 is more formally known as the Expected Surprise Prediction, and it aims to grab the inside track on the latest analyst estimate revisions ahead of a company's report. The idea is relatively intuitive as a newer projection might be based on more complete 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.

When we join a positive earnings ESP with a Zacks Rank #3 (Hold) or stronger, stocks posted a positive bottom-line surprise 70% of the time. Plus, this system saw investors produce roughly 28% 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 Take-Two Interactive?

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. Take-Two Interactive (TTWO Quick QuoteTTWO - Free Report) earns a #1 (Strong Buy) right now and its Most Accurate Estimate sits at $0.02 a share, just six days from its upcoming earnings release on August 8, 2024.

Take-Two Interactive's Earnings ESP sits at +85.72%, which, as explained above, is calculated by taking the percentage difference between the $0.02 Most Accurate Estimate and the Zacks Consensus Estimate of $0.01. TTWO 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.

TTWO is part of a big group of Consumer Discretionary stocks that boast a positive ESP, and investors may want to take a look at Walt Disney (DIS Quick QuoteDIS - Free Report) as well.

Walt Disney is a Zacks Rank #3 (Hold) stock, and is getting ready to report earnings on August 7, 2024. DIS' Most Accurate Estimate sits at $1.21 a share five days from its next earnings release.

The Zacks Consensus Estimate for Walt Disney is $1.20, and when you take the percentage difference between that number and its Most Accurate Estimate, you get the Earnings ESP figure of +0.83%.

TTWO and DIS' 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 >>