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.

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.

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 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 ranking of #3 (Hold), or 60% of all stocks covered by the Zacks Rank, are expected to perform in-line with the broader market. Stocks with rankings of #2 (Buy) and #1 (Strong Buy), 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 Medtronic?

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. Medtronic (MDT Quick QuoteMDT - Free Report) earns a #3 (Hold) right now and its Most Accurate Estimate sits at $1.28 a share, just 28 days from its upcoming earnings release on February 21, 2023.

By taking the percentage difference between the $1.28 Most Accurate Estimate and the $1.26 Zacks Consensus Estimate, Medtronic has an Earnings ESP of +1.47%. Investors should also know that MDT 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.

MDT is just one of a large group of Medical stocks with a positive ESP figure. NovoCure (NVCR Quick QuoteNVCR - Free Report) is another qualifying stock you may want to consider.

NovoCure is a Zacks Rank #3 (Hold) stock, and is getting ready to report earnings on February 23, 2023. NVCR's Most Accurate Estimate sits at -$0.29 a share 30 days from its next earnings release.

The Zacks Consensus Estimate for NovoCure is -$0.32, and when you take the percentage difference between that number and its Most Accurate Estimate, you get the Earnings ESP figure of +9.47%.

MDT and NVCR's positive ESP figures tell us that both stocks have a good chance at beating analyst expectations in their next earnings report.

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 >>