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.

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.

With this in mind, the Expected Surprise Prediction compares the Most Accurate Estimate (being the most recent) against the overall Zacks Consensus Estimate. The percentage difference provides the ESP figure. The system also utilizes our core Zacks Rank to provide a stronger system for identifying stocks that might beat their next quarterly earnings estimate and possibly see the stock price climb.

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 Lululemon?

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. Lululemon (LULU Quick QuoteLULU - Free Report) earns a #3 (Hold) right now and its Most Accurate Estimate sits at $2.98 a share, just 24 days from its upcoming earnings release on August 29, 2024.

LULU has an Earnings ESP figure of +0.66%, which, as explained above, is calculated by taking the percentage difference between the $2.98 Most Accurate Estimate and the Zacks Consensus Estimate of $2.96. Lululemon 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.

LULU is part of a big group of Consumer Discretionary stocks that boast a positive ESP, and investors may want to take a look at Take-Two Interactive (TTWO Quick QuoteTTWO - Free Report) as well.

Slated to report earnings on August 8, 2024, Take-Two Interactive holds a #1 (Strong Buy) ranking on the Zacks Rank, and it's Most Accurate Estimate is $0.02 a share three days from its next quarterly update.

The Zacks Consensus Estimate for Take-Two Interactive is $0.01, and when you take the percentage difference between that number and its Most Accurate Estimate, you get the Earnings ESP figure of +85.72%.

LULU and TTWO'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 >>