Two factors often determine stock prices in the long run: earnings and interest rates. Investors can't control the latter, but they can focus on a company's earnings results every quarter.

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 Nvidia?

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. Nvidia (NVDA Quick QuoteNVDA - Free Report) holds a #2 (Buy) at the moment and its Most Accurate Estimate comes in at $5.63 a share 22 days away from its upcoming earnings release on May 22, 2024.

NVDA has an Earnings ESP figure of +2.5%, which, as explained above, is calculated by taking the percentage difference between the $5.63 Most Accurate Estimate and the Zacks Consensus Estimate of $5.49. Nvidia is one of a large database 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.

NVDA is one of just a large database of Computer and Technology stocks with positive ESPs. Another solid-looking stock is Snap (SNAP Quick QuoteSNAP - Free Report) .

Snap, which is readying to report earnings on July 23, 2024, sits at a Zacks Rank #2 (Buy) right now. It's Most Accurate Estimate is currently $0.03 a share, and SNAP is 84 days out from its next earnings report.

The Zacks Consensus Estimate for Snap is $0, and when you take the percentage difference between that number and its Most Accurate Estimate, you get the Earnings ESP figure of +2350.02%.

NVDA and SNAP's 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 >>