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.

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 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.

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.

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.

Most stocks, about 60%, fall into the #3 (Hold) category, and they are expected to perform in-line with the broader market. Stocks with a #2 (Buy) and #1 (Strong Buy) rating, or the top 15% and top 5% of stocks, respectively, should outperform the market, with Strong Buy stocks outperforming more than any other rank.

Should You Consider GE Vernova?

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. GE Vernova (GEV Quick QuoteGEV - Free Report) holds a #2 (Buy) at the moment and its Most Accurate Estimate comes in at $0.23 a share one day away from its upcoming earnings release on October 23, 2024.

By taking the percentage difference between the $0.23 Most Accurate Estimate and the $0.22 Zacks Consensus Estimate, GE Vernova has an Earnings ESP of +1.9%. Investors should also know that GEV 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.

GEV is one of just a large database of Oils and Energy stocks with positive ESPs. Another solid-looking stock is Sunrun (RUN Quick QuoteRUN - Free Report) .

Slated to report earnings on November 7, 2024, Sunrun holds a #3 (Hold) ranking on the Zacks Rank, and it's Most Accurate Estimate is -$0.14 a share 16 days from its next quarterly update.

For Sunrun, the percentage difference between its Most Accurate Estimate and its Zacks Consensus Estimate of -$0.16 is +12.57%.

GEV and RUN'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 >>