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.

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.

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.

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 Illumina?

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. Illumina (ILMN Quick QuoteILMN - Free Report) earns a #3 (Hold) right now and its Most Accurate Estimate sits at $0.61 a share, just zero days from its upcoming earnings release on February 10, 2022.

By taking the percentage difference between the $0.61 Most Accurate Estimate and the $0.50 Zacks Consensus Estimate, Illumina has an Earnings ESP of 22%. Investors should also know that ILMN is just one of a large group of stocks with positive ESPs. All of these qualifying stocks can be filtered by ESP, Zacks Rank, % Surprise (Last Qtr.), and Reporting date.

Using the Zacks Earnings ESP to your advantage is just the start. Make sure to check out the Earnings ESP Home Page for even more earnings-related tips and tricks to design a winning investment portfolio.

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 >>