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.

The earnings figure itself is key, of course, but a beat or miss on the bottom line can sometimes be just as, if not more, important. Therefore, investors should consider paying close attention to these earnings surprises, as a big beat can help a stock climb and vice versa.

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 Expected Surprise Prediction, or ESP, works by locking in on the most up-to-date analyst earnings revisions because they can be more accurate than estimates from weeks or even months before the actual release date. The thinking is pretty straightforward: analysts who provide earnings estimates closer to the report are likely to have more 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.

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 Cava Group?

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. Cava Group (CAVA Quick QuoteCAVA - Free Report) earns a #3 (Hold) right now and its Most Accurate Estimate sits at $0.14 a share, just one day from its upcoming earnings release on August 22, 2024.

CAVA has an Earnings ESP figure of +11.37%, which, as explained above, is calculated by taking the percentage difference between the $0.14 Most Accurate Estimate and the Zacks Consensus Estimate of $0.13. Cava Group 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.

CAVA is part of a big group of Retail and Wholesale stocks that boast a positive ESP, and investors may want to take a look at American Eagle Outfitters (AEO Quick QuoteAEO - Free Report) as well.

American Eagle Outfitters is a Zacks Rank #2 (Buy) stock, and is getting ready to report earnings on August 29, 2024. AEO's Most Accurate Estimate sits at $0.39 a share eight days from its next earnings release.

American Eagle Outfitters' Earnings ESP figure currently stands at +1.97% after taking the percentage difference between its Most Accurate Estimate and its Zacks Consensus Estimate of $0.38.

Because both stocks hold a positive Earnings ESP, CAVA and AEO 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 >>