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.

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 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.

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 #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 Albemarle?

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. Albemarle (ALB Quick QuoteALB - Free Report) holds a #3 (Hold) at the moment and its Most Accurate Estimate comes in at $5.48 a share 30 days away from its upcoming earnings release on November 1, 2023.

By taking the percentage difference between the $5.48 Most Accurate Estimate and the $4.14 Zacks Consensus Estimate, Albemarle has an Earnings ESP of +32.18%. Investors should also know that ALB 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.

ALB is part of a big group of Basic Materials stocks that boast a positive ESP, and investors may want to take a look at Southern Copper (SCCO Quick QuoteSCCO - Free Report) as well.

Slated to report earnings on October 27, 2023, Southern Copper holds a #3 (Hold) ranking on the Zacks Rank, and it's Most Accurate Estimate is $0.89 a share 25 days from its next quarterly update.

The Zacks Consensus Estimate for Southern Copper is $0.82, and when you take the percentage difference between that number and its Most Accurate Estimate, you get the Earnings ESP figure of +8.54%.

Because both stocks hold a positive Earnings ESP, ALB and SCCO 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 >>