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.

The earnings figure itself is key, of course, but a beat or miss on the bottom line can sometimes be just as, if not more, important. Therefore, investors should consider paying close attention to these earnings surprises, as a big beat can help a stock climb and vice versa.

The ability to identify stocks that are likely to top quarterly earnings expectations can be profitable, but it's no simple task. Here at Zacks, our Earnings ESP filter helps make things easier.

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.

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 Home Depot?

The final step today is to look at a stock that meets our ESP qualifications. Home Depot (HD Quick QuoteHD - Free Report) earns a #3 (Hold) 29 days from its next quarterly earnings release on November 12, 2024, and its Most Accurate Estimate comes in at $3.74 a share.

By taking the percentage difference between the $3.74 Most Accurate Estimate and the $3.64 Zacks Consensus Estimate, Home Depot has an Earnings ESP of +2.64%. Investors should also know that HD 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.

HD is part of a big group of Retail and Wholesale stocks that boast a positive ESP, and investors may want to take a look at Deckers (DECK Quick QuoteDECK - Free Report) as well.

Deckers is a Zacks Rank #3 (Hold) stock, and is getting ready to report earnings on October 24, 2024. DECK's Most Accurate Estimate sits at $1.23 a share 10 days from its next earnings release.

The Zacks Consensus Estimate for Deckers is $1.22, and when you take the percentage difference between that number and its Most Accurate Estimate, you get the Earnings ESP figure of +0.85%.

HD and DECK'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 >>