Two factors often determine stock prices in the long run: earnings and interest rates. Investors can't control the latter, but they can focus on a company's earnings results every quarter.

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.

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.

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.

Most stocks, about 60%, fall into the #3 (Hold) category, and they are expected to perform in-line with the broader market. Stocks with a #2 (Buy) and #1 (Strong Buy) rating, or the top 15% and top 5% of stocks, respectively, should outperform the market, with Strong Buy stocks outperforming more than any other rank.

Should You Consider KB Home?

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. KB Home (KBH Quick QuoteKBH - Free Report) earns a #2 (Buy) right now and its Most Accurate Estimate sits at $2.07 a share, just 30 days from its upcoming earnings release on September 18, 2024.

KBH has an Earnings ESP figure of +1.31%, which, as explained above, is calculated by taking the percentage difference between the $2.07 Most Accurate Estimate and the Zacks Consensus Estimate of $2.04. KB Home 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.

KBH is part of a big group of Construction stocks that boast a positive ESP, and investors may want to take a look at D.R. Horton (DHI Quick QuoteDHI - Free Report) as well.

D.R. Horton, which is readying to report earnings on November 5, 2024, sits at a Zacks Rank #3 (Hold) right now. It's Most Accurate Estimate is currently $4.15 a share, and DHI is 78 days out from its next earnings report.

The Zacks Consensus Estimate for D.R. Horton is $4.15, and when you take the percentage difference between that number and its Most Accurate Estimate, you get the Earnings ESP figure of +0.23%.

Because both stocks hold a positive Earnings ESP, KBH and DHI 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 >>