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 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.

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 Guardant Health?

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. Guardant Health (GH Quick QuoteGH - Free Report) earns a #3 (Hold) right now and its Most Accurate Estimate sits at -$0.48 a share, just 30 days from its upcoming earnings release on February 27, 2025.

Guardant Health's Earnings ESP sits at +4.04%, which, as explained above, is calculated by taking the percentage difference between the -$0.48 Most Accurate Estimate and the Zacks Consensus Estimate of -$0.50. GH 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.

GH is just one of a large group of Medical stocks with a positive ESP figure. Exact Sciences (EXAS Quick QuoteEXAS - Free Report) is another qualifying stock you may want to consider.

Exact Sciences, which is readying to report earnings on February 19, 2025, sits at a Zacks Rank #3 (Hold) right now. It's Most Accurate Estimate is currently -$0.31 a share, and EXAS is 22 days out from its next earnings report.

Exact Sciences' Earnings ESP figure currently stands at +1.59% after taking the percentage difference between its Most Accurate Estimate and its Zacks Consensus Estimate of -$0.32.

Because both stocks hold a positive Earnings ESP, GH and EXAS 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 >>