Earnings are arguably the most important single number on a company's quarterly financial report. Wall Street clearly dives into all of the other metrics and management's input, but the EPS figure helps cut through all the noise.

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.

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.

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 Virgin Galactic?

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. Virgin Galactic (SPCE Quick QuoteSPCE - Free Report) holds a #2 (Buy) at the moment and its Most Accurate Estimate comes in at -$3.58 a share 29 days away from its upcoming earnings release on November 13, 2024.

By taking the percentage difference between the -$3.58 Most Accurate Estimate and the -$4.10 Zacks Consensus Estimate, Virgin Galactic has an Earnings ESP of +12.58%. Investors should also know that SPCE 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.

SPCE is just one of a large group of Aerospace stocks with a positive ESP figure. Lockheed Martin (LMT Quick QuoteLMT - Free Report) is another qualifying stock you may want to consider.

Lockheed Martin is a Zacks Rank #3 (Hold) stock, and is getting ready to report earnings on October 22, 2024. LMT's Most Accurate Estimate sits at $6.59 a share seven days from its next earnings release.

Lockheed Martin's Earnings ESP figure currently stands at +2.46% after taking the percentage difference between its Most Accurate Estimate and its Zacks Consensus Estimate of $6.43.

Because both stocks hold a positive Earnings ESP, SPCE and LMT 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 >>