Wall Street watches a company's quarterly report closely to understand as much as possible about its recent performance and what to expect going forward. Of course, one figure often stands out among the rest: earnings.

We know earnings results are vital, but how a company performs compared to bottom line expectations can be even more important when it comes to stock prices, especially in the near-term. This means that investors might want to take advantage of these earnings surprises.

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.

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 Arch Capital Group?

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. Arch Capital Group (ACGL Quick QuoteACGL - Free Report) holds a #2 (Buy) at the moment and its Most Accurate Estimate comes in at $1.50 a share seven days away from its upcoming earnings release on October 30, 2023.

By taking the percentage difference between the $1.50 Most Accurate Estimate and the $1.48 Zacks Consensus Estimate, Arch Capital Group has an Earnings ESP of +1.37%. Investors should also know that ACGL 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.

ACGL is one of just a large database of Finance stocks with positive ESPs. Another solid-looking stock is Lincoln National (LNC Quick QuoteLNC - Free Report) .

Slated to report earnings on November 1, 2023, Lincoln National holds a #3 (Hold) ranking on the Zacks Rank, and it's Most Accurate Estimate is $1.80 a share nine days from its next quarterly update.

The Zacks Consensus Estimate for Lincoln National is $1.79, and when you take the percentage difference between that number and its Most Accurate Estimate, you get the Earnings ESP figure of +0.56%.

ACGL and LNC'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 >>