Earnings are arguably the most important single number on a company's quarterly financial report. Wall Street clearly dives into all of the other metrics and management's input, but the EPS figure helps cut through all the noise.

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.

Hunting for 'earnings whispers' or companies poised to beat their quarterly earnings estimates is a somewhat common practice. But that doesn't make it easy. One way that has been proven to work is by using the Zacks Earnings ESP tool.

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.

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.

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 Home Depot?

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. Home Depot (HD Quick QuoteHD - Free Report) earns a #3 (Hold) right now and its Most Accurate Estimate sits at $2.80 a share, just six days from its upcoming earnings release on February 20, 2024.

Home Depot's Earnings ESP sits at +1.86%, which, as explained above, is calculated by taking the percentage difference between the $2.80 Most Accurate Estimate and the Zacks Consensus Estimate of $2.75. HD 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.

HD is part of a big group of Retail and Wholesale stocks that boast a positive ESP, and investors may want to take a look at Williams-Sonoma (WSM Quick QuoteWSM - Free Report) as well.

Williams-Sonoma, which is readying to report earnings on March 21, 2024, sits at a Zacks Rank #3 (Hold) right now. It's Most Accurate Estimate is currently $5.31 a share, and WSM is 36 days out from its next earnings report.

The Zacks Consensus Estimate for Williams-Sonoma is $5.08, and when you take the percentage difference between that number and its Most Accurate Estimate, you get the Earnings ESP figure of +4.53%.

HD and WSM'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 >>