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.
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 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.
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.
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 Lemonade?
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. Lemonade (LMND) earns a #2 (Buy) right now and its Most Accurate Estimate sits at -$0.79 a share, just one day from its upcoming earnings release on August 5, 2025.
Lemonade's Earnings ESP sits at +2.40%, which, as explained above, is calculated by taking the percentage difference between the -$0.79 Most Accurate Estimate and the Zacks Consensus Estimate of -$0.81. LMND 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.
LMND is just one of a large group of Finance stocks with a positive ESP figure. Morgan Stanley (MS) is another qualifying stock you may want to consider.
Morgan Stanley is a Zacks Rank #2 (Buy) stock, and is getting ready to report earnings on October 15, 2025. MS' Most Accurate Estimate sits at $2.03 a share 72 days from its next earnings release.
Morgan Stanley's Earnings ESP figure currently stands at +0.67% after taking the percentage difference between its Most Accurate Estimate and its Zacks Consensus Estimate of $2.02.
LMND and MS' 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 >>
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Lemonade, Inc. (LMND): Free Stock Analysis Report Morgan Stanley (MS): Free Stock Analysis ReportThis article originally published on Zacks Investment Research (zacks.com).
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