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.

Life and the stock market are both about expectations, and rising above what is expected is often rewarded, while falling short can come with negative consequences. Investors might want to try to capture stronger returns by finding positive 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.

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.

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 ranking of #3 (Hold), or 60% of all stocks covered by the Zacks Rank, are expected to perform in-line with the broader market. Stocks with rankings of #2 (Buy) and #1 (Strong Buy), 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 Affirm Holdings?

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. Affirm Holdings (AFRM Quick QuoteAFRM - Free Report) earns a #2 (Buy) right now and its Most Accurate Estimate sits at -$0.36 a share, just 13 days from its upcoming earnings release on August 28, 2024.

Affirm Holdings' Earnings ESP sits at +19.64%, which, as explained above, is calculated by taking the percentage difference between the -$0.36 Most Accurate Estimate and the Zacks Consensus Estimate of -$0.45. AFRM 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.

AFRM is one of just a large database of Business Services stocks with positive ESPs. Another solid-looking stock is AppLovin (APP Quick QuoteAPP - Free Report) .

AppLovin is a Zacks Rank #1 (Strong Buy) stock, and is getting ready to report earnings on November 13, 2024. APP's Most Accurate Estimate sits at $0.96 a share 90 days from its next earnings release.

AppLovin's Earnings ESP figure currently stands at +7.58% after taking the percentage difference between its Most Accurate Estimate and its Zacks Consensus Estimate of $0.89.

Because both stocks hold a positive Earnings ESP, AFRM and APP 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 >>