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Earnings are arguably the most important single number on a company's quarterly financial report. Wall Street clearly dives into all of the other metrics and management's input, but the EPS figure helps cut through all the noise.

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.

The ability to identify stocks that are likely to top quarterly earnings expectations can be profitable, but it's no simple task. Here at Zacks, our Earnings ESP filter helps make things easier.

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.

With this in mind, the Expected Surprise Prediction compares the Most Accurate Estimate (being the most recent) against the overall Zacks Consensus Estimate. The percentage difference provides the ESP figure. The system also utilizes our core Zacks Rank to provide a stronger system for identifying stocks that might beat their next quarterly earnings estimate and possibly see the stock price climb.

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 American Airlines?

The final step today is to look at a stock that meets our ESP qualifications. American Airlines (AAL) earns a #3 (Hold) 30 days from its next quarterly earnings release on January 23, 2025, and its Most Accurate Estimate comes in at $0.62 a share.

By taking the percentage difference between the $0.62 Most Accurate Estimate and the $0.57 Zacks Consensus Estimate, American Airlines has an Earnings ESP of +8.6%. Investors should also know that AAL 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.

AAL is one of just a large database of Transportation stocks with positive ESPs. Another solid-looking stock is Southwest Airlines (LUV).

Southwest Airlines is a Zacks Rank #1 (Strong Buy) stock, and is getting ready to report earnings on January 30, 2025. LUV's Most Accurate Estimate sits at $0.41 a share 37 days from its next earnings release.

The Zacks Consensus Estimate for Southwest Airlines is $0.40, and when you take the percentage difference between that number and its Most Accurate Estimate, you get the Earnings ESP figure of +2.89%.

AAL and LUV'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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American Airlines Group Inc. (AAL) : Free Stock Analysis Report

Southwest Airlines Co. (LUV) : Free Stock Analysis Report

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The views and opinions expressed herein are the views and opinions of the author and do not necessarily reflect those of Nasdaq, Inc.