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.

The earnings figure itself is key, of course, but a beat or miss on the bottom line can sometimes be just as, if not more, important. Therefore, investors should consider paying close attention to these earnings surprises, as a big beat can help a stock climb and vice versa.

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.

With this in mind, the Expected Surprise Prediction compares the Most Accurate Estimate (being the most recent) against the overall Zacks Consensus Estimate. The percentage difference provides the ESP figure. The system also utilizes our core Zacks Rank to provide a stronger system for identifying stocks that might beat their next quarterly earnings estimate and possibly see the stock price climb.

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 Lululemon?

The final step today is to look at a stock that meets our ESP qualifications. Lululemon (LULU Quick QuoteLULU - Free Report) earns a #3 (Hold) seven days from its next quarterly earnings release on December 5, 2024, and its Most Accurate Estimate comes in at $2.70 a share.

By taking the percentage difference between the $2.70 Most Accurate Estimate and the $2.69 Zacks Consensus Estimate, Lululemon has an Earnings ESP of +0.45%. Investors should also know that LULU 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.

LULU is one of just a large database of Consumer Discretionary stocks with positive ESPs. Another solid-looking stock is Walt Disney (DIS Quick QuoteDIS - Free Report) .

Walt Disney is a Zacks Rank #2 (Buy) stock, and is getting ready to report earnings on February 5, 2025. DIS' Most Accurate Estimate sits at $1.45 a share 69 days from its next earnings release.

For Walt Disney, the percentage difference between its Most Accurate Estimate and its Zacks Consensus Estimate of $1.43 is +1.81%.

LULU and DIS' 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 >>