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.

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.

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.

The core of the ESP model is comparing the Most Accurate Estimate to the Zacks Consensus Estimate, where the resulting percentage difference between the two equals the Expected Surprise Prediction. The Zacks Rank is also factored into the ESP metric to better help find companies that appear poised to top their next bottom-line consensus estimate, which will hopefully help lift the stock price.

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 Arista Networks?

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. Arista Networks (ANET Quick QuoteANET - Free Report) holds a #2 (Buy) at the moment and its Most Accurate Estimate comes in at $2.10 a share 21 days away from its upcoming earnings release on November 7, 2024.

Arista Networks' Earnings ESP sits at +0.96%, which, as explained above, is calculated by taking the percentage difference between the $2.10 Most Accurate Estimate and the Zacks Consensus Estimate of $2.08. ANET is also part of a large group of stocks that boast a positive ESP. Make sure to utilize our Earnings ESP Filter to uncover the best stocks to buy or sell before they've reported.

ANET is one of just a large database of Computer and Technology stocks with positive ESPs. Another solid-looking stock is Uber Technologies (UBER Quick QuoteUBER - Free Report) .

Uber Technologies, which is readying to report earnings on October 31, 2024, sits at a Zacks Rank #2 (Buy) right now. It's Most Accurate Estimate is currently $0.61 a share, and UBER is 14 days out from its next earnings report.

Uber Technologies' Earnings ESP figure currently stands at +50% after taking the percentage difference between its Most Accurate Estimate and its Zacks Consensus Estimate of $0.41.

Because both stocks hold a positive Earnings ESP, ANET and UBER 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 >>