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 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.

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.

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 SM Energy?

Now that we understand what the ESP is and how beneficial it can be, let's dive into a stock that currently fits the bill. SM Energy (SM Quick QuoteSM - Free Report) earns a #1 (Strong Buy) right now and its Most Accurate Estimate sits at $1.94 a share, just eight days from its upcoming earnings release on February 19, 2025.

SM Energy's Earnings ESP sits at +0.36%, which, as explained above, is calculated by taking the percentage difference between the $1.94 Most Accurate Estimate and the Zacks Consensus Estimate of $1.93. SM 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.

SM is just one of a large group of Oils and Energy stocks with a positive ESP figure. PBF Energy (PBF Quick QuotePBF - Free Report) is another qualifying stock you may want to consider.

Slated to report earnings on February 13, 2025, PBF Energy holds a #3 (Hold) ranking on the Zacks Rank, and it's Most Accurate Estimate is -$2.28 a share two days from its next quarterly update.

The Zacks Consensus Estimate for PBF Energy is -$2.46, and when you take the percentage difference between that number and its Most Accurate Estimate, you get the Earnings ESP figure of +7.2%.

SM and PBF's positive ESP metrics may signal that a positive earnings surprise for both stocks is on the horizon.

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 >>