Quarterly financial reports play a vital role on Wall Street, as they help investors see how a company has performed and what might be coming down the road in the near-term. And out of all of the metrics and results to consider, earnings is one of the most important.

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.

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 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.

When we join a positive earnings ESP with a Zacks Rank #3 (Hold) or stronger, stocks posted a positive bottom-line surprise 70% of the time. Plus, this system saw investors produce roughly 28% 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 Iridium Communications?

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. Iridium Communications (IRDM Quick QuoteIRDM - Free Report) earns a #3 (Hold) right now and its Most Accurate Estimate sits at $0.04 a share, just eight days from its upcoming earnings release on July 25, 2023.

By taking the percentage difference between the $0.04 Most Accurate Estimate and the $0.03 Zacks Consensus Estimate, Iridium Communications has an Earnings ESP of +25%. Investors should also know that IRDM 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.

IRDM is one of just a large database of Computer and Technology stocks with positive ESPs. Another solid-looking stock is KLA (KLAC Quick QuoteKLAC - Free Report) .

KLA is a Zacks Rank #2 (Buy) stock, and is getting ready to report earnings on July 27, 2023. KLAC's Most Accurate Estimate sits at $4.82 a share 10 days from its next earnings release.

KLA's Earnings ESP figure currently stands at +0.02% after taking the percentage difference between its Most Accurate Estimate and its Zacks Consensus Estimate of $4.82.

Because both stocks hold a positive Earnings ESP, IRDM and KLAC 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 >>