Quarterly financial reports play a vital role on Wall Street, as they help investors see how a company has performed and what might be coming down the road in the near-term. And out of all of the metrics and results to consider, earnings is one of the most important.

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.

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 Coca-Cola?

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. Coca-Cola (KO Quick QuoteKO - Free Report) holds a #3 (Hold) at the moment and its Most Accurate Estimate comes in at $0.52 a share 18 days away from its upcoming earnings release on February 11, 2025.

KO has an Earnings ESP figure of +0.5%, which, as explained above, is calculated by taking the percentage difference between the $0.52 Most Accurate Estimate and the Zacks Consensus Estimate of $0.51. Coca-Cola is one of a large database 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.

KO is part of a big group of Consumer Staples stocks that boast a positive ESP, and investors may want to take a look at Estee Lauder (EL Quick QuoteEL - Free Report) as well.

Estee Lauder is a Zacks Rank #3 (Hold) stock, and is getting ready to report earnings on February 4, 2025. EL's Most Accurate Estimate sits at $0.32 a share 11 days from its next earnings release.

Estee Lauder's Earnings ESP figure currently stands at +0.85% after taking the percentage difference between its Most Accurate Estimate and its Zacks Consensus Estimate of $0.32.

KO and EL'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 >>