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.

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 Earnings ESP is more formally known as the Expected Surprise Prediction, and it aims to grab the inside track on the latest analyst estimate revisions ahead of a company's report. The idea is relatively intuitive as a newer projection might be based on more complete information.

The core of the ESP model is comparing the Most Accurate Estimate to the Zacks Consensus Estimate, where the resulting percentage difference between the two equals the Expected Surprise Prediction. The Zacks Rank is also factored into the ESP metric to better help find companies that appear poised to top their next bottom-line consensus estimate, which will hopefully help lift the stock price.

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.

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 Roku?

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. Roku (ROKU Quick QuoteROKU - Free Report) holds a #3 (Hold) at the moment and its Most Accurate Estimate comes in at -$0.52 a share 16 days away from its upcoming earnings release on July 27, 2023.

ROKU has an Earnings ESP figure of +57.17%, which, as explained above, is calculated by taking the percentage difference between the -$0.52 Most Accurate Estimate and the Zacks Consensus Estimate of -$1.21. Roku is one of a large database 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.

ROKU is one of just a large database of Consumer Discretionary stocks with positive ESPs. Another solid-looking stock is Comcast (CMCSA Quick QuoteCMCSA - Free Report) .

Slated to report earnings on July 27, 2023, Comcast holds a #3 (Hold) ranking on the Zacks Rank, and it's Most Accurate Estimate is $0.99 a share 16 days from its next quarterly update.

Comcast's Earnings ESP figure currently stands at +0.22% after taking the percentage difference between its Most Accurate Estimate and its Zacks Consensus Estimate of $0.98.

ROKU and CMCSA'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 >>