Earnings are arguably the most important single number on a company's quarterly financial report. Wall Street clearly dives into all of the other metrics and management's input, but the EPS figure helps cut through all the noise.

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 Expected Surprise Prediction, or ESP, works by locking in on the most up-to-date analyst earnings revisions because they can be more accurate than estimates from weeks or even months before the actual release date. The thinking is pretty straightforward: analysts who provide earnings estimates closer to the report are likely to have more 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.

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 AutoZone?

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. AutoZone (AZO Quick QuoteAZO - Free Report) earns a #3 (Hold) right now and its Most Accurate Estimate sits at $31.27 a share, just eight days from its upcoming earnings release on December 5, 2023.

AutoZone's Earnings ESP sits at +1.46%, which, as explained above, is calculated by taking the percentage difference between the $31.27 Most Accurate Estimate and the Zacks Consensus Estimate of $30.82. AZO is also part of a large group of stocks that boast a positive ESP. Make sure to utilize our Earnings ESP Filter to uncover the best stocks to buy or sell before they've reported.

AZO is just one of a large group of Retail and Wholesale stocks with a positive ESP figure. Dick's Sporting Goods (DKS Quick QuoteDKS - Free Report) is another qualifying stock you may want to consider.

Dick's Sporting Goods is a Zacks Rank #3 (Hold) stock, and is getting ready to report earnings on March 5, 2024. DKS' Most Accurate Estimate sits at $3.26 a share 99 days from its next earnings release.

For Dick's Sporting Goods, the percentage difference between its Most Accurate Estimate and its Zacks Consensus Estimate of $3.24 is +0.55%.

AZO and DKS' 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 >>