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.
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.
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 Monolithic Power?
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. Monolithic Power (MPWR) earns a #3 (Hold) right now and its Most Accurate Estimate sits at $7.86 a share, just 20 days from its upcoming earnings release on October 29, 2026.
By taking the percentage difference between the $7.86 Most Accurate Estimate and the $7.55 Zacks Consensus Estimate, Monolithic Power has an Earnings ESP of +4.06%. Investors should also know that MPWR 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.
MPWR is one of just a large database of Computer and Technology stocks with positive ESPs. Another solid-looking stock is Oracle (ORCL).
Oracle, which is readying to report earnings on December 9, 2026, sits at a Zacks Rank #3 (Hold) right now. Its Most Accurate Estimate is currently $1.89 a share, and ORCL is 61 days out from its next earnings report.
The Zacks Consensus Estimate for Oracle is $1.88, and when you take the percentage difference between that number and its Most Accurate Estimate, you get the Earnings ESP figure of +0.15%.
Because both stocks hold a positive Earnings ESP, MPWR and ORCL could potentially post earnings beats in their next reports.
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 Monolithic Power Systems, Inc. (MPWR)?
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Monolithic Power Systems, Inc. (MPWR): Free Stock Analysis Report
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This article originally published on Zacks Investment Research (zacks.com).