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.
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 is more formally known as the Expected Surprise Prediction, and it aims to grab the inside track on the latest analyst estimate revisions ahead of a company's report. The idea is relatively intuitive as a newer projection might be based on more complete 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.
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 Kratos?
The final step today is to look at a stock that meets our ESP qualifications. Kratos (KTOS) earns a #3 (Hold) 30 days from its next quarterly earnings release on August 6, 2026, and its Most Accurate Estimate comes in at $0.14 a share.
Kratos' Earnings ESP sits at +4.25%, which, as explained above, is calculated by taking the percentage difference between the $0.14 Most Accurate Estimate and the Zacks Consensus Estimate of $0.13. KTOS 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.
KTOS is one of just a large database of Aerospace stocks with positive ESPs. Another solid-looking stock is TransDigm Group (TDG).
Slated to report earnings on August 4, 2026, TransDigm Group holds a #3 (Hold) ranking on the Zacks Rank, and its Most Accurate Estimate is $10.62 a share 28 days from its next quarterly update.
For TransDigm Group, the percentage difference between its Most Accurate Estimate and its Zacks Consensus Estimate of $10.26 is +3.54%.
KTOS and TDG'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 >>
Should You Invest in Kratos Defense & Security Solutions, Inc. (KTOS)?
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Kratos Defense & Security Solutions, Inc. (KTOS): Free Stock Analysis Report
Transdigm Group Incorporated (TDG): Free Stock Analysis Report
This article originally published on Zacks Investment Research (zacks.com).