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.

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.

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 #3 (Hold) ranking, which is most stocks covered at 60%, are expected to perform in-line with the broader market. But stocks that fall into the #2 (Buy) and #1 (Strong Buy) ranking, 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 Yelp?

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. Yelp (YELP Quick QuoteYELP - Free Report) earns a #1 (Strong Buy) right now and its Most Accurate Estimate sits at $0.39 a share, just 30 days from its upcoming earnings release on November 7, 2024.

By taking the percentage difference between the $0.39 Most Accurate Estimate and the $0.38 Zacks Consensus Estimate, Yelp has an Earnings ESP of +3.54%. Investors should also know that YELP is one of a large group 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.

YELP is just one of a large group of Computer and Technology stocks with a positive ESP figure. Autodesk (ADSK Quick QuoteADSK - Free Report) is another qualifying stock you may want to consider.

Slated to report earnings on November 19, 2024, Autodesk holds a #3 (Hold) ranking on the Zacks Rank, and it's Most Accurate Estimate is $2.13 a share 42 days from its next quarterly update.

The Zacks Consensus Estimate for Autodesk is $2.11, and when you take the percentage difference between that number and its Most Accurate Estimate, you get the Earnings ESP figure of +1.19%.

Because both stocks hold a positive Earnings ESP, YELP and ADSK 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 >>