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 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.

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 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 Travelers?

The last thing we will do today, now that we have a grasp on the ESP and how powerful of a tool it can be, is to quickly look at a qualifying stock. Travelers (TRV Quick QuoteTRV - Free Report) holds a #3 (Hold) at the moment and its Most Accurate Estimate comes in at $3.96 a share 20 days away from its upcoming earnings release on October 17, 2024.

Travelers' Earnings ESP sits at +3.46%, which, as explained above, is calculated by taking the percentage difference between the $3.96 Most Accurate Estimate and the Zacks Consensus Estimate of $3.83. TRV 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.

TRV is just one of a large group of Finance stocks with a positive ESP figure. Redfin (RDFN Quick QuoteRDFN - Free Report) is another qualifying stock you may want to consider.

Slated to report earnings on November 7, 2024, Redfin holds a #3 (Hold) ranking on the Zacks Rank, and it's Most Accurate Estimate is -$0.18 a share 41 days from its next quarterly update.

For Redfin, the percentage difference between its Most Accurate Estimate and its Zacks Consensus Estimate of -$0.20 is +10%.

Because both stocks hold a positive Earnings ESP, TRV and RDFN 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 >>