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 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 Automatic Data Processing?

The final step today is to look at a stock that meets our ESP qualifications. Automatic Data Processing (ADP Quick QuoteADP - Free Report) earns a #3 (Hold) 30 days from its next quarterly earnings release on October 23, 2024, and its Most Accurate Estimate comes in at $2.21 a share.

By taking the percentage difference between the $2.21 Most Accurate Estimate and the $2.20 Zacks Consensus Estimate, Automatic Data Processing has an Earnings ESP of +0.37%. Investors should also know that ADP 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.

ADP is just one of a large group of Business Services stocks with a positive ESP figure. DocuSign (DOCU Quick QuoteDOCU - Free Report) is another qualifying stock you may want to consider.

DocuSign is a Zacks Rank #1 (Strong Buy) stock, and is getting ready to report earnings on December 5, 2024. DOCU's Most Accurate Estimate sits at $0.87 a share 73 days from its next earnings release.

For DocuSign, the percentage difference between its Most Accurate Estimate and its Zacks Consensus Estimate of $0.85 is +1.86%.

Because both stocks hold a positive Earnings ESP, ADP and DOCU 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 >>