Quarterly financial reports play a vital role on Wall Street, as they help investors see how a company has performed and what might be coming down the road in the near-term. And out of all of the metrics and results to consider, earnings is one of the most important.

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.

Now that we understand the basic idea, let's look at how the Expected Surprise Prediction works. The ESP is calculated by comparing the Most Accurate Estimate to the Zacks Consensus Estimate, with the percentage difference between the two giving us the Zacks ESP figure.

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 Ecolab?

The final step today is to look at a stock that meets our ESP qualifications. Ecolab (ECL Quick QuoteECL - Free Report) earns a #3 (Hold) 29 days from its next quarterly earnings release on October 29, 2024, and its Most Accurate Estimate comes in at $1.87 a share.

ECL has an Earnings ESP figure of +2.99%, which, as explained above, is calculated by taking the percentage difference between the $1.87 Most Accurate Estimate and the Zacks Consensus Estimate of $1.82. Ecolab 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.

ECL is part of a big group of Basic Materials stocks that boast a positive ESP, and investors may want to take a look at Carpenter Technology (CRS Quick QuoteCRS - Free Report) as well.

Carpenter Technology, which is readying to report earnings on October 24, 2024, sits at a Zacks Rank #1 (Strong Buy) right now. It's Most Accurate Estimate is currently $1.55 a share, and CRS is 24 days out from its next earnings report.

The Zacks Consensus Estimate for Carpenter Technology is $1.45, and when you take the percentage difference between that number and its Most Accurate Estimate, you get the Earnings ESP figure of +6.95%.

Because both stocks hold a positive Earnings ESP, ECL and CRS 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 >>