Two factors often determine stock prices in the long run: earnings and interest rates. Investors can't control the latter, but they can focus on a company's earnings results every quarter.

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.

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.

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 ranking of #3 (Hold), or 60% of all stocks covered by the Zacks Rank, are expected to perform in-line with the broader market. Stocks with rankings of #2 (Buy) and #1 (Strong Buy), 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 Meta Platforms?

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. Meta Platforms (META Quick QuoteMETA - Free Report) holds a #3 (Hold) at the moment and its Most Accurate Estimate comes in at $5.25 a share 29 days away from its upcoming earnings release on October 23, 2024.

Meta Platforms' Earnings ESP sits at +2%, which, as explained above, is calculated by taking the percentage difference between the $5.25 Most Accurate Estimate and the Zacks Consensus Estimate of $5.15. META 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.

META is part of a big group of Computer and Technology stocks that boast a positive ESP, and investors may want to take a look at Badger Meter (BMI Quick QuoteBMI - Free Report) as well.

Slated to report earnings on October 17, 2024, Badger Meter holds a #3 (Hold) ranking on the Zacks Rank, and it's Most Accurate Estimate is $1.03 a share 23 days from its next quarterly update.

Badger Meter's Earnings ESP figure currently stands at +2.2% after taking the percentage difference between its Most Accurate Estimate and its Zacks Consensus Estimate of $1.01.

META and BMI's positive ESP figures tell us that both stocks have a good chance at beating analyst expectations in their next earnings report.

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 >>