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.

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 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.

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 Coherent?

The last thing we will do today, now that we have a grasp on the ESP and how powerful of a tool it can be, is to quickly look at a qualifying stock. Coherent (COHR Quick QuoteCOHR - Free Report) holds a #1 (Strong Buy) at the moment and its Most Accurate Estimate comes in at $0.75 a share 13 days away from its upcoming earnings release on February 3, 2025.

Coherent's Earnings ESP sits at +7.48%, which, as explained above, is calculated by taking the percentage difference between the $0.75 Most Accurate Estimate and the Zacks Consensus Estimate of $0.70. COHR is also part of a large group of stocks that boast a positive ESP. Make sure to utilize our Earnings ESP Filter to uncover the best stocks to buy or sell before they've reported.

COHR is one of just a large database of Business Services stocks with positive ESPs. Another solid-looking stock is Automatic Data Processing (ADP Quick QuoteADP - Free Report) .

Automatic Data Processing, which is readying to report earnings on January 29, 2025, sits at a Zacks Rank #2 (Buy) right now. It's Most Accurate Estimate is currently $2.30 a share, and ADP is eight days out from its next earnings report.

The Zacks Consensus Estimate for Automatic Data Processing is $2.27, and when you take the percentage difference between that number and its Most Accurate Estimate, you get the Earnings ESP figure of +1.15%.

COHR and ADP's 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 >>