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.

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.

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.

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.

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 ranking of #3 (Hold), or 60% of all stocks covered by the Zacks Rank, are expected to perform in-line with the broader market. Stocks with rankings of #2 (Buy) and #1 (Strong Buy), 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 Dave & Buster's?

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. Dave & Buster's (PLAY) holds a #3 (Hold) at the moment and its Most Accurate Estimate comes in at $1.10 a share four days away from its upcoming earnings release on April 2, 2024.

By taking the percentage difference between the $1.10 Most Accurate Estimate and the $1.07 Zacks Consensus Estimate, Dave & Buster's has an Earnings ESP of +2.8%. Investors should also know that PLAY is one of a large group 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.

PLAY is one of just a large database of Retail and Wholesale stocks with positive ESPs. Another solid-looking stock is TJX (TJX) .

TJX is a Zacks Rank #3 (Hold) stock, and is getting ready to report earnings on May 15, 2024. TJX's Most Accurate Estimate sits at $0.87 a share 47 days from its next earnings release.

TJX's Earnings ESP figure currently stands at +0.1% after taking the percentage difference between its Most Accurate Estimate and its Zacks Consensus Estimate of $0.87.

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

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