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 Earnings ESP is more formally known as the Expected Surprise Prediction, and it aims to grab the inside track on the latest analyst estimate revisions ahead of a company's report. The idea is relatively intuitive as a newer projection might be based on more complete 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 Guardant Health?

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. Guardant Health (GH Quick QuoteGH - Free Report) holds a #2 (Buy) at the moment and its Most Accurate Estimate comes in at -$0.49 a share seven days away from its upcoming earnings release on February 20, 2025.

By taking the percentage difference between the -$0.49 Most Accurate Estimate and the -$0.50 Zacks Consensus Estimate, Guardant Health has an Earnings ESP of +1.75%. Investors should also know that GH 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.

GH is just one of a large group of Medical stocks with a positive ESP figure. Exact Sciences (EXAS Quick QuoteEXAS - Free Report) is another qualifying stock you may want to consider.

Exact Sciences, which is readying to report earnings on February 19, 2025, sits at a Zacks Rank #3 (Hold) right now. It's Most Accurate Estimate is currently -$0.31 a share, and EXAS is six days out from its next earnings report.

Exact Sciences' Earnings ESP figure currently stands at +1.59% after taking the percentage difference between its Most Accurate Estimate and its Zacks Consensus Estimate of -$0.32.

GH and EXAS' 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 >>