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.

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 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.

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 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 Tri Pointe Homes?

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. Tri Pointe Homes (TPH Quick QuoteTPH - Free Report) earns a #2 (Buy) right now and its Most Accurate Estimate sits at $1.03 a share, just 30 days from its upcoming earnings release on October 24, 2024.

By taking the percentage difference between the $1.03 Most Accurate Estimate and the $1.02 Zacks Consensus Estimate, Tri Pointe Homes has an Earnings ESP of +0.98%. Investors should also know that TPH 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.

TPH is just one of a large group of Construction stocks with a positive ESP figure. Toll Brothers (TOL Quick QuoteTOL - Free Report) is another qualifying stock you may want to consider.

Toll Brothers is a Zacks Rank #3 (Hold) stock, and is getting ready to report earnings on December 3, 2024. TOL's Most Accurate Estimate sits at $4.31 a share 70 days from its next earnings release.

The Zacks Consensus Estimate for Toll Brothers is $4.30, and when you take the percentage difference between that number and its Most Accurate Estimate, you get the Earnings ESP figure of +0.33%.

Because both stocks hold a positive Earnings ESP, TPH and TOL 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 >>