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.

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.

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 American Eagle Outfitters?

The final step today is to look at a stock that meets our ESP qualifications. American Eagle Outfitters (AEO Quick QuoteAEO - Free Report) earns a #3 (Hold) seven days from its next quarterly earnings release on November 19, 2024, and its Most Accurate Estimate comes in at $0.48 a share.

By taking the percentage difference between the $0.48 Most Accurate Estimate and the $0.47 Zacks Consensus Estimate, American Eagle Outfitters has an Earnings ESP of +3.07%. Investors should also know that AEO 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.

AEO is just one of a large group of Retail and Wholesale stocks with a positive ESP figure. Abercrombie & Fitch (ANF Quick QuoteANF - Free Report) is another qualifying stock you may want to consider.

Slated to report earnings on November 26, 2024, Abercrombie & Fitch holds a #1 (Strong Buy) ranking on the Zacks Rank, and it's Most Accurate Estimate is $2.42 a share 14 days from its next quarterly update.

The Zacks Consensus Estimate for Abercrombie & Fitch is $2.31, and when you take the percentage difference between that number and its Most Accurate Estimate, you get the Earnings ESP figure of +4.76%.

Because both stocks hold a positive Earnings ESP, AEO and ANF 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 >>