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.

The ability to identify stocks that are likely to top quarterly earnings expectations can be profitable, but it's no simple task. Here at Zacks, our Earnings ESP filter helps make things easier.

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.

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 #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 Southwest Airlines?

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. Southwest Airlines (LUV Quick QuoteLUV - Free Report) earns a #2 (Buy) right now and its Most Accurate Estimate sits at $0.07 a share, just 13 days from its upcoming earnings release on October 24, 2024.

Southwest Airlines' Earnings ESP sits at +68.16%, which, as explained above, is calculated by taking the percentage difference between the $0.07 Most Accurate Estimate and the Zacks Consensus Estimate of $0.04. LUV 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.

LUV is part of a big group of Transportation stocks that boast a positive ESP, and investors may want to take a look at GE Aerospace (GE Quick QuoteGE - Free Report) as well.

GE Aerospace, which is readying to report earnings on October 22, 2024, sits at a Zacks Rank #2 (Buy) right now. It's Most Accurate Estimate is currently $1.16 a share, and GE is 11 days out from its next earnings report.

GE Aerospace's Earnings ESP figure currently stands at +3.34% after taking the percentage difference between its Most Accurate Estimate and its Zacks Consensus Estimate of $1.12.

LUV and GE's positive ESP metrics may signal that a positive earnings surprise for both stocks is on the horizon.

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 >>