Two factors often determine stock prices in the long run: earnings and interest rates. Investors can't control the latter, but they can focus on a company's earnings results every quarter.

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.

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.

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 Toll Brothers?

The final step today is to look at a stock that meets our ESP qualifications. Toll Brothers (TOL Quick QuoteTOL - Free Report) earns a #2 (Buy) 29 days from its next quarterly earnings release on December 3, 2024, and its Most Accurate Estimate comes in at $4.41 a share.

By taking the percentage difference between the $4.41 Most Accurate Estimate and the $4.31 Zacks Consensus Estimate, Toll Brothers has an Earnings ESP of +2.35%. Investors should also know that TOL 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.

TOL is one of just a large database of Construction stocks with positive ESPs. Another solid-looking stock is Lennar (LEN Quick QuoteLEN - Free Report) .

Lennar is a Zacks Rank #3 (Hold) stock, and is getting ready to report earnings on December 12, 2024. LEN's Most Accurate Estimate sits at $4.27 a share 38 days from its next earnings release.

For Lennar, the percentage difference between its Most Accurate Estimate and its Zacks Consensus Estimate of $4.22 is +1.23%.

Because both stocks hold a positive Earnings ESP, TOL and LEN 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 >>