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.

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.

Hunting for 'earnings whispers' or companies poised to beat their quarterly earnings estimates is a somewhat common practice. But that doesn't make it easy. One way that has been proven to work is by using the Zacks Earnings ESP tool.

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.

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 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 Lam Research?

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. Lam Research (LRCX Quick QuoteLRCX - Free Report) holds a #3 (Hold) at the moment and its Most Accurate Estimate comes in at $3.20 a share nine days away from its upcoming earnings release on October 23, 2024.

By taking the percentage difference between the $3.20 Most Accurate Estimate and the $1.52 Zacks Consensus Estimate, Lam Research has an Earnings ESP of +110.53%. Investors should also know that LRCX 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.

LRCX 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 #2 (Buy) ranking on the Zacks Rank, and it's Most Accurate Estimate is $1.06 a share three days from its next quarterly update.

The Zacks Consensus Estimate for Badger Meter is $1.02, and when you take the percentage difference between that number and its Most Accurate Estimate, you get the Earnings ESP figure of +3.45%.

LRCX and BMI'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 >>