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.

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.

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.

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.

In fact, when we combined a Zacks Rank #3 (Hold) or better and a positive Earnings ESP, stocks produced a positive surprise 70% of the time. Perhaps most importantly, using these parameters has helped produce 28.3% 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 Consolidated Water?

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. Consolidated Water (CWCO Quick QuoteCWCO - Free Report) earns a #2 (Buy) right now and its Most Accurate Estimate sits at $0.47 a share, just 30 days from its upcoming earnings release on April 4, 2024.

Consolidated Water's Earnings ESP sits at +4.44%, which, as explained above, is calculated by taking the percentage difference between the $0.47 Most Accurate Estimate and the Zacks Consensus Estimate of $0.45. CWCO 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.

CWCO is part of a big group of Utilities stocks that boast a positive ESP, and investors may want to take a look at American Electric Power (AEP Quick QuoteAEP - Free Report) as well.

American Electric Power is a Zacks Rank #3 (Hold) stock, and is getting ready to report earnings on May 2, 2024. AEP's Most Accurate Estimate sits at $1.37 a share 58 days from its next earnings release.

For American Electric Power, the percentage difference between its Most Accurate Estimate and its Zacks Consensus Estimate of $1.35 is +1.48%.

Because both stocks hold a positive Earnings ESP, CWCO and AEP could potentially post earnings beats in their next reports.

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 >>