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 Expected Surprise Prediction, or ESP, works by locking in on the most up-to-date analyst earnings revisions because they can be more accurate than estimates from weeks or even months before the actual release date. The thinking is pretty straightforward: analysts who provide earnings estimates closer to the report are likely to have more 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.

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 Sunrun?

The final step today is to look at a stock that meets our ESP qualifications. Sunrun (RUN Quick QuoteRUN - Free Report) earns a #3 (Hold) 20 days from its next quarterly earnings release on November 7, 2024, and its Most Accurate Estimate comes in at -$0.14 a share.

By taking the percentage difference between the -$0.14 Most Accurate Estimate and the -$0.16 Zacks Consensus Estimate, Sunrun has an Earnings ESP of +12.57%. Investors should also know that RUN 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.

RUN is one of just a large database of Oils and Energy stocks with positive ESPs. Another solid-looking stock is TC Energy (TRP Quick QuoteTRP - Free Report) .

Slated to report earnings on November 7, 2024, TC Energy holds a #3 (Hold) ranking on the Zacks Rank, and it's Most Accurate Estimate is $0.72 a share 20 days from its next quarterly update.

The Zacks Consensus Estimate for TC Energy is $0.69, and when you take the percentage difference between that number and its Most Accurate Estimate, you get the Earnings ESP figure of +4.57%.

RUN and TRP'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 >>