Earnings are arguably the most important single number on a company's quarterly financial report. Wall Street clearly dives into all of the other metrics and management's input, but the EPS figure helps cut through all the noise.

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 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.

When we join a positive earnings ESP with a Zacks Rank #3 (Hold) or stronger, stocks posted a positive bottom-line surprise 70% of the time. Plus, this system saw investors produce roughly 28% 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 Clorox?

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. Clorox (CLX Quick QuoteCLX - Free Report) earns a #2 (Buy) right now and its Most Accurate Estimate sits at $1.38 a share, just 29 days from its upcoming earnings release on November 6, 2024.

By taking the percentage difference between the $1.38 Most Accurate Estimate and the $1.36 Zacks Consensus Estimate, Clorox has an Earnings ESP of +1.48%. Investors should also know that CLX 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.

CLX is just one of a large group of Consumer Staples stocks with a positive ESP figure. Mondelez (MDLZ Quick QuoteMDLZ - Free Report) is another qualifying stock you may want to consider.

Mondelez is a Zacks Rank #3 (Hold) stock, and is getting ready to report earnings on November 6, 2024. MDLZ's Most Accurate Estimate sits at $0.87 a share 29 days from its next earnings release.

Mondelez's Earnings ESP figure currently stands at +3.14% after taking the percentage difference between its Most Accurate Estimate and its Zacks Consensus Estimate of $0.84.

Because both stocks hold a positive Earnings ESP, CLX and MDLZ 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 >>