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, 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.

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.

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 #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 Zoetis?

The final step today is to look at a stock that meets our ESP qualifications. Zoetis (ZTS Quick QuoteZTS - Free Report) earns a #3 (Hold) 12 days from its next quarterly earnings release on November 4, 2024, and its Most Accurate Estimate comes in at $1.47 a share.

By taking the percentage difference between the $1.47 Most Accurate Estimate and the $1.46 Zacks Consensus Estimate, Zoetis has an Earnings ESP of +0.69%. Investors should also know that ZTS 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.

ZTS is one of just a large database of Medical stocks with positive ESPs. Another solid-looking stock is Vertex Pharmaceuticals (VRTX Quick QuoteVRTX - Free Report) .

Slated to report earnings on November 4, 2024, Vertex Pharmaceuticals holds a #3 (Hold) ranking on the Zacks Rank, and it's Most Accurate Estimate is $4.13 a share 12 days from its next quarterly update.

The Zacks Consensus Estimate for Vertex Pharmaceuticals is $4.13, and when you take the percentage difference between that number and its Most Accurate Estimate, you get the Earnings ESP figure of +0.14%.

Because both stocks hold a positive Earnings ESP, ZTS and VRTX 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 >>