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.

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.

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, or Expected Surprise Prediction, aims to find earnings surprises by focusing on the most recent analyst revisions. The basic premise is that if an analyst reevaluates their earnings estimate ahead of an earnings release, it means they likely have new information that could possibly be more accurate.

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.

Stocks with a #3 (Hold) ranking, which is most stocks covered at 60%, are expected to perform in-line with the broader market. But stocks that fall into the #2 (Buy) and #1 (Strong Buy) ranking, 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 Digital Realty Trust?

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. Digital Realty Trust (DLR Quick QuoteDLR - Free Report) earns a #3 (Hold) right now and its Most Accurate Estimate sits at $1.72 a share, just eight days from its upcoming earnings release on October 24, 2024.

By taking the percentage difference between the $1.72 Most Accurate Estimate and the $1.67 Zacks Consensus Estimate, Digital Realty Trust has an Earnings ESP of +2.72%. Investors should also know that DLR 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.

DLR is one of just a large database of Finance stocks with positive ESPs. Another solid-looking stock is Wells Fargo (WFC Quick QuoteWFC - Free Report) .

Wells Fargo, which is readying to report earnings on January 10, 2025, sits at a Zacks Rank #3 (Hold) right now. It's Most Accurate Estimate is currently $1.31 a share, and WFC is 86 days out from its next earnings report.

Wells Fargo's Earnings ESP figure currently stands at +0.46% after taking the percentage difference between its Most Accurate Estimate and its Zacks Consensus Estimate of $1.30.

DLR and WFC'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 >>