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.

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 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.

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 Aflac?

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. Aflac (AFL Quick QuoteAFL - Free Report) earns a #1 (Strong Buy) right now and its Most Accurate Estimate sits at $1.80 a share, just 30 days from its upcoming earnings release on October 30, 2024.

Aflac's Earnings ESP sits at +8.06%, which, as explained above, is calculated by taking the percentage difference between the $1.80 Most Accurate Estimate and the Zacks Consensus Estimate of $1.67. AFL 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.

AFL is one of just a large database of Finance stocks with positive ESPs. Another solid-looking stock is American Express (AXP Quick QuoteAXP - Free Report) .

American Express, which is readying to report earnings on October 18, 2024, sits at a Zacks Rank #2 (Buy) right now. It's Most Accurate Estimate is currently $3.31 a share, and AXP is 18 days out from its next earnings report.

The Zacks Consensus Estimate for American Express is $3.26, and when you take the percentage difference between that number and its Most Accurate Estimate, you get the Earnings ESP figure of +1.52%.

Because both stocks hold a positive Earnings ESP, AFL and AXP 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 >>