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.

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, or Expected Surprise Prediction, aims to find earnings surprises by focusing on the most recent analyst revisions. The basic premise is that if an analyst reevaluates their earnings estimate ahead of an earnings release, it means they likely have new information that could possibly be more accurate.

With this in mind, the Expected Surprise Prediction compares the Most Accurate Estimate (being the most recent) against the overall Zacks Consensus Estimate. The percentage difference provides the ESP figure. The system also utilizes our core Zacks Rank to provide a stronger system for identifying stocks that might beat their next quarterly earnings estimate and possibly see the stock price climb.

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 Skyward Specialty Insurance?

The final step today is to look at a stock that meets our ESP qualifications. Skyward Specialty Insurance (SKWD Quick QuoteSKWD - Free Report) earns a #1 (Strong Buy) 21 days from its next quarterly earnings release on May 1, 2024, and its Most Accurate Estimate comes in at $0.71 a share.

Skyward Specialty Insurance's Earnings ESP sits at +7.99%, which, as explained above, is calculated by taking the percentage difference between the $0.71 Most Accurate Estimate and the Zacks Consensus Estimate of $0.66. SKWD 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.

SKWD is part of a big group of Finance stocks that boast a positive ESP, and investors may want to take a look at Bank of America (BAC Quick QuoteBAC - Free Report) as well.

Slated to report earnings on April 16, 2024, Bank of America holds a #3 (Hold) ranking on the Zacks Rank, and it's Most Accurate Estimate is $0.77 a share six days from its next quarterly update.

Bank of America's Earnings ESP figure currently stands at +0.72% after taking the percentage difference between its Most Accurate Estimate and its Zacks Consensus Estimate of $0.77.

SKWD and BAC'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 >>