Earlier this year we reported on the impressive returns that were being produced from a stock screen that allows you to see which companies are attracting favourable upgrades from brokers. The Earnings Upgrade Momentum screen has continued to outperform the FTSE so far this year and one of the interesting current patterns is that half of the 10 qualifying companies are gold mining stocks. So called "earnings upgrades" – when analysts revise their expectations about a company’s performance – can be a significant indicator for individual investors. Indeed, while relying too heavily on the opinions of analysts can be a risky business, these upgrades have been shown to be a fairly influential guide to the future.
How the screen works
As a reminder, this screen works by seeking out stocks that are covered by more than three analysts. Thereafter, each company’s earnings per share estimates for the following year should have been increased by more than 5% during the previous month. In addition, there must have been at least one upgrade during the previous month, and the number of upgrades must be higher than the number of downgrades.
At the height of the financial reporting season in March this year (when the market hit a 2012 high of 5,966 points), the screen was the best performing Stockopedia strategy. Among the companies qualifying at the time were paper and packaging group Mondi (LON:MNDI) and media company Itv (LON:ITV). Both were hit by the market-wide volatility that struck in early summer but have subsequently recovered and are now trading close to their 1-year highs. By contrast, Max Petroleum, a small-cap oil and gas stock on the screen back then, went on to see its price collapse under the weight of poor news from its operations in Kazakhstan. That illustrates the importance of doing further analysis and/or using diversification when screening, rather than just pickling one name blindly from a list.
In the year-to-date, the Earnings Upgrade Momentum screen has produced a return of 15.9%. The list of stocks qualifiying changes every day although we rebalance our model portfolio each quarter. Interestingly, out of the 10 now qualifying companies, six of them are mining stocks – and five of those have a strong emphasis on gold production.
