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.

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.

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 Verizon Communications?

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. Verizon Communications (VZ Quick QuoteVZ - Free Report) earns a #3 (Hold) right now and its Most Accurate Estimate sits at $1.19 a share, just 11 days from its upcoming earnings release on October 22, 2024.

By taking the percentage difference between the $1.19 Most Accurate Estimate and the $1.18 Zacks Consensus Estimate, Verizon Communications has an Earnings ESP of +0.73%. Investors should also know that VZ 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.

VZ is one of just a large database of Computer and Technology stocks with positive ESPs. Another solid-looking stock is Yelp (YELP Quick QuoteYELP - Free Report) .

Slated to report earnings on November 7, 2024, Yelp holds a #2 (Buy) ranking on the Zacks Rank, and it's Most Accurate Estimate is $0.39 a share 27 days from its next quarterly update.

The Zacks Consensus Estimate for Yelp is $0.38, and when you take the percentage difference between that number and its Most Accurate Estimate, you get the Earnings ESP figure of +3.54%.

VZ and YELP's 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 >>