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.

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.

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.

Bringing together a positive earnings ESP alongside a Zacks Rank #3 (Hold) or better has helped stocks report a positive earnings surprise 70% of the time. Furthermore, by using these parameters, investors have seen 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 Dynatrace?

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. Dynatrace (DT Quick QuoteDT - Free Report) holds a #3 (Hold) at the moment and its Most Accurate Estimate comes in at $0.33 a share 16 days away from its upcoming earnings release on November 7, 2024.

DT has an Earnings ESP figure of +1.97%, which, as explained above, is calculated by taking the percentage difference between the $0.33 Most Accurate Estimate and the Zacks Consensus Estimate of $0.32. Dynatrace is one of a large database 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.

DT is one of just a large database of Computer and Technology stocks with positive ESPs. Another solid-looking stock is Cadence Design Systems (CDNS Quick QuoteCDNS - Free Report) .

Cadence Design Systems is a Zacks Rank #2 (Buy) stock, and is getting ready to report earnings on October 28, 2024. CDNS' Most Accurate Estimate sits at $1.45 a share six days from its next earnings release.

Cadence Design Systems' Earnings ESP figure currently stands at +0.69% after taking the percentage difference between its Most Accurate Estimate and its Zacks Consensus Estimate of $1.44.

DT and CDNS' 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 >>