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.
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 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.
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 Northrop Grumman?
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. Northrop Grumman (NOC) earns a #3 (Hold) right now and its Most Accurate Estimate sits at $7.03 a share, just 18 days from its upcoming earnings release on January 27, 2026.
Northrop Grumman's Earnings ESP sits at +0.54%, which, as explained above, is calculated by taking the percentage difference between the $7.03 Most Accurate Estimate and the Zacks Consensus Estimate of $6.99. NOC 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.
NOC is one of just a large database of Aerospace stocks with positive ESPs. Another solid-looking stock is RTX (RTX).
RTX is a Zacks Rank #3 (Hold) stock, and is getting ready to report earnings on January 27, 2026. RTX's Most Accurate Estimate sits at $1.50 a share 18 days from its next earnings release.
The Zacks Consensus Estimate for RTX is $1.45, and when you take the percentage difference between that number and its Most Accurate Estimate, you get the Earnings ESP figure of +3.50%.
NOC and RTX'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 >>
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Northrop Grumman Corporation (NOC): Free Stock Analysis Report RTX Corporation (RTX): Free Stock Analysis ReportThis article originally published on Zacks Investment Research (zacks.com).
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