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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, 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.

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 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 Bank of America?

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. Bank of America (BAC - Free Report) holds a #3 (Hold) at the moment and its Most Accurate Estimate comes in at $0.81 a share 28 days away from its upcoming earnings release on October 17, 2023.

BAC has an Earnings ESP figure of +1.04%, which, as explained above, is calculated by taking the percentage difference between the $0.81 Most Accurate Estimate and the Zacks Consensus Estimate of $0.80. Bank of America 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.

BAC is just one of a large group of Finance stocks with a positive ESP figure. MetLife (MET - Free Report) is another qualifying stock you may want to consider.

MetLife, which is readying to report earnings on November 1, 2023, sits at a Zacks Rank #3 (Hold) right now. Its Most Accurate Estimate is currently $2.21 a share, and MET is 43 days out from its next earnings report.

For MetLife, the percentage difference between its Most Accurate Estimate and its Zacks Consensus Estimate of $2.13 is +3.76%.

BAC and MET's positive ESP metrics may signal that a positive earnings surprise for both stocks is on the horizon.

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