5 stocks beating earnings expectations

Wednesday, May 15 2013 by
5 stocks beating earnings expectations

Beating earnings expectations tends to be a sure fire way for companies to hit the financial headlines and get a warm reception from shareholders on results day. For momentum investors with an eye for a surprise, keeping track of these City stars has long been acknowledged as a profitable strategy. Not only that, but a review of London listed stocks that have sprung positive surprises over the past year shows that a number of them also come with potentially attractive valuations. 

Why earnings surprises matter 

The investment case for earnings surprises isn’t new; academics have been studying the effectiveness of earnings surprise-based trading strategies for decades while some hedge funds swear by them. Back in 1968, two US finance professors called Ball and Brown started the debate with research showing that in any given year, companies with the largest increases in earnings also had the largest increases in share price. Although the findings were obviously expected, one unusual factor that emerged was that those same stocks saw their share prices carry on rising over a period of up to three months after reporting their earnings. 

This sort of pricing lag is a sensitive subject for those who believe the stock market is efficient. Ordinarily you might expect the market to seamlessly incorporate the full implications of an earning surprise into a stock price, but in study after study this is shown not to be the case. Naturally, academics have turned their attention to finding out what causes this so-called ‘post earnings announcement drift’, or earnings momentum, and why the market can be so inefficient at pricing-in earnings news. 

What many have since concluded is that it’s the ‘surprise’ component of an earnings announcement that causes the delay. In particular, analysts and investors are slow to react to the full implications of the news – a factor that’s widely believed to be a major driver of price momentum generally. A 2005 study by Jegadeesh and Livnat found that analysts can take as long as six months to incorporate earnings and revenue surprises into their forecasts. 

There have been numerous attempts to quantify how much of an opportunity earnings surprises represent to investors. In Leonard Zacks’ Handbook of Equity Market Anomalies US professor Daniel Taylor reviews various research and finds that the returns to a long-short strategy based on buying shares…

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Phoenix Group Holdings plc is a United Kingdom-based company that specializes in the acquisition and management of closed life insurance and pension funds. The Company has an Open business, which manufactures and underwrites new products and policies to support people saving in areas, such as workplace pensions and self-invested personal pensions. It also has a brand, SunLife, which sells a range of financial products for the over 50 market. It operates through three business segments: UK Heritage, UK Open and Europe. The UK Heritage segment provides a range of life and pensions products. Assets under administration in its open business are held in three product lines: Workplace, Retail pensions and Wrap. It also includes capital-light products. The European segment distributes unit linked life assurance products which have no material guarantees. Its subsidiaries include Phoenix Life Limited, Phoenix Life Assurance Limited and Abbey Life Assurance Company Limited. more »

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Beazley plc is a holding company. The Company's segments include Life, accident & health, which underwrites life, health, personal accident, sports and income protection risks; Marine, which underwrites a spectrum of marine classes, including hull, energy, cargo and specie, piracy, satellite, aviation, kidnap and ransom, and war risks; Political risks & contingency, which underwrites terrorism, political violence, expropriation and credit risks, as well as contingency and risks associated with contract frustration; Property, which underwrites commercial, high-value homeowners' and construction and engineering property insurance on a worldwide basis; Reinsurance, which specializes in writing property catastrophe, property per risk, casualty clash, aggregate excess of loss and pro-rata business, and Specialty lines, which underwrites professional liability, management liability and environmental liability, including architects and engineers, healthcare, cyber and lawyers. more »

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Pebble Beach Systems Group plc, formerly Vislink plc, is a software and technology company. The Company is engaged in the collection and delivery of video and data from scene to screen. The Company's Pebble Beach Systems division is a developer and supplier of automation, Channel-in-a-Box and content management software solutions for television broadcasters, cable and satellite operators. For the broadcast markets, the Company provides wireless communication solutions for the collection of live news, sport and entertainment. The Company's products include Marina, which is an enterprise level playout automation platform for multi-channel applications; Orca, which is an Internet Protocol (IP)-enabled cloud-based integrated channel delivery solution; Dolphin, which provides multi-format integrated channel delivery solutions based on information technology (IT) hardware, and Stingray, which is a self-contained Channel-in a-Box. more »

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  Is LON:PHNX fundamentally strong or weak? Find out More »

2 Comments on this Article show/hide all

43market 24th May '13 1 of 2

if we re trading shorter term then the direction of the chart matters too

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tournesol 29th May '13 2 of 2

I'll see Ben Hobson's liking for Beazley and raise it!

Anyone who bought BEZ at 199p on Feb 7 has not only enjoyed a decent rise in the share price - 240p by yesterday

but has also received a dividend of 14p - which included a special dividend - so that's a total gain of 55p/share = 27.5% which is jolly pleasing thank you.

I bought a slug of the retail bonds issued by Beazley last year. When the special divi was announced I swapped half of those bonds into the ords and topped that up with fresh cash. That was at 195p. I'm very happy with the outcome to-date.

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