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.

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 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.

With this in mind, the Expected Surprise Prediction compares the Most Accurate Estimate (being the most recent) against the overall Zacks Consensus Estimate. The percentage difference provides the ESP figure. The system also utilizes our core Zacks Rank to provide a stronger system for identifying stocks that might beat their next quarterly earnings estimate and possibly see the stock price climb.

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.

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 Sony?

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. Sony (SONY Quick QuoteSONY - Free Report) holds a #3 (Hold) at the moment and its Most Accurate Estimate comes in at $0.55 a share 29 days away from its upcoming earnings release on May 9, 2023.

By taking the percentage difference between the $0.55 Most Accurate Estimate and the $0.50 Zacks Consensus Estimate, Sony has an Earnings ESP of +10.74%. Investors should also know that SONY 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.

SONY is just one of a large group of Consumer Discretionary stocks with a positive ESP figure. H&R Block (HRB Quick QuoteHRB - Free Report) is another qualifying stock you may want to consider.

H&R Block is a Zacks Rank #2 (Buy) stock, and is getting ready to report earnings on May 9, 2023. HRB's Most Accurate Estimate sits at $4.52 a share 29 days from its next earnings release.

The Zacks Consensus Estimate for H&R Block is $4.52, and when you take the percentage difference between that number and its Most Accurate Estimate, you get the Earnings ESP figure of +0.07%.

SONY and HRB'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 >>