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.
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.
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 CVS Health?
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. CVS Health (CVS) holds a #2 (Buy) at the moment and its Most Accurate Estimate comes in at $1.90 a share 19 days away from its upcoming earnings release on August 5, 2026.
CVS Health's Earnings ESP sits at +1.42%, which, as explained above, is calculated by taking the percentage difference between the $1.90 Most Accurate Estimate and the Zacks Consensus Estimate of $1.87. CVS 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.
CVS is part of a big group of Medical stocks that boast a positive ESP, and investors may want to take a look at Johnson & Johnson (JNJ) as well.
Johnson & Johnson, which is readying to report earnings on October 13, 2026, sits at a Zacks Rank #3 (Hold) right now. Its Most Accurate Estimate is currently $3.08 a share, and JNJ is 88 days out from its next earnings report.
Johnson & Johnson's Earnings ESP figure currently stands at +2.10% after taking the percentage difference between its Most Accurate Estimate and its Zacks Consensus Estimate of $3.02.
CVS and JNJ's positive ESP figures tell us that both stocks have a good chance at beating analyst expectations in their next earnings report.
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 CVS Health Corporation (CVS)?
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CVS Health Corporation (CVS): Free Stock Analysis Report
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This article originally published on Zacks Investment Research (zacks.com).