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.

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.

In fact, when we combined a Zacks Rank #3 (Hold) or better and a positive Earnings ESP, stocks produced a positive surprise 70% of the time. Perhaps most importantly, using these parameters has helped produce 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 Travelers?

The final step today is to look at a stock that meets our ESP qualifications. Travelers (TRV Quick QuoteTRV - Free Report) earns a #2 (Buy) nine days from its next quarterly earnings release on January 22, 2025, and its Most Accurate Estimate comes in at $7.24 a share.

By taking the percentage difference between the $7.24 Most Accurate Estimate and the $6.50 Zacks Consensus Estimate, Travelers has an Earnings ESP of +11.28%. Investors should also know that TRV 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.

TRV is just one of a large group of Finance stocks with a positive ESP figure. Progressive (PGR Quick QuotePGR - Free Report) is another qualifying stock you may want to consider.

Progressive, which is readying to report earnings on January 22, 2025, sits at a Zacks Rank #3 (Hold) right now. It's Most Accurate Estimate is currently $3.58 a share, and PGR is nine days out from its next earnings report.

Progressive's Earnings ESP figure currently stands at +4.03% after taking the percentage difference between its Most Accurate Estimate and its Zacks Consensus Estimate of $3.44.

Because both stocks hold a positive Earnings ESP, TRV and PGR 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 >>