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.

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.

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.

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.

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.

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 Dycom Industries?

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. Dycom Industries (DY Quick QuoteDY - Free Report) holds a #1 (Strong Buy) at the moment and its Most Accurate Estimate comes in at $1.79 a share 29 days away from its upcoming earnings release on November 28, 2023.

By taking the percentage difference between the $1.79 Most Accurate Estimate and the $1.77 Zacks Consensus Estimate, Dycom Industries has an Earnings ESP of +1.24%. Investors should also know that DY 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.

DY is one of just a large database of Construction stocks with positive ESPs. Another solid-looking stock is Vulcan Materials (VMC Quick QuoteVMC - Free Report) .

Vulcan Materials, which is readying to report earnings on February 15, 2024, sits at a Zacks Rank #2 (Buy) right now. It's Most Accurate Estimate is currently $1.37 a share, and VMC is 108 days out from its next earnings report.

Vulcan Materials' Earnings ESP figure currently stands at +2.52% after taking the percentage difference between its Most Accurate Estimate and its Zacks Consensus Estimate of $1.34.

Because both stocks hold a positive Earnings ESP, DY and VMC 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 >>