5 stocks on the move after broker upgrades

Monday, May 20 2013 by
5 stocks on the move after broker upgrades

While the opinions of brokers often attract legitimate scepticism among investors, there’s little doubt that anyone keeping an eye on our analyst upgrade screen recently would have been impressed. Of all the investing strategies we track here at Stockopedia, the Earnings Upgrade Momentum screen has wiped the floor with most of the others and, unlike some of the other best-performing screens, it comes with decent levels of diversification to boot. Over six months it has returned a startling 55.6% against a healthy gain of 17.8% in the FTSE 100, which ties in with the performance of a similar AAII screen which has trounced the index for over a decade. So what’s causing these impressive screen returns?


Who cares what brokers say?

A glance over the decades of research into the impact that broker research can have on stock prices reveals that investors need to tread carefully, particularly if you are thinking of trading on ‘buy’ and ‘sell’ recommendations. Despite the way you see broker recommendations bandied around by bulls on bulletin boards, the research shows that the price impact of new ‘buys’ and ‘sells’ is sudden and short-lived – and because of the bias inherent in much broker research, sometimes analyst buy recommendations are best used as a contrarian indicator!

However, a strategy based on trading on changes in broker estimates, rather than recommendations, is supported by much more promising research. This is likely to do with freshness. Barber et al found that nearly 50% of all recommendations are left unchanged when they are revisited, approximately 300 days after they were first made. Earnings forecasts, in contrast, are generally more responsive to short-term news events (being revised on a quarterly or even monthly basis). 

Among the most compelling research that found in favour of earning upgrades was a 1996 study by Phillip McKnight and Steven Todd. They assessed the revision anomaly across Europe and found that stocks with the greatest number of upward revisions in earnings, net of downward revisions, achieved significantly higher returns than otherwise similar stocks. They tracked a portfolio of shares in the highest 20% of net upward revisions and found that it outperformed the bottom 20% of upward revisions by more than 16% annually.

McKnight and Todd concluded that an EPS revisions strategy worked so effectively because ‘bad news travels quickly, but good news…

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As per our Terms of Use, Stockopedia is a financial news & data site, discussion forum and content aggregator. Our site should be used for educational & informational purposes only. We do not provide investment advice, recommendations or views as to whether an investment or strategy is suited to the investment needs of a specific individual. You should make your own decisions and seek independent professional advice before doing so. Remember: Shares can go down as well as up. Past performance is not a guide to future performance & investors may not get back the amount invested. ?>

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Northgate plc is an investment holding company. The Company is engaged in the light commercial vehicle hire business in the United Kingdom, Ireland and Spain. The Company's segments include UK, Spain and Corporate. The Company has a national network of approximately 80 branches across the United Kingdom and Ireland with a total fleet size of over 53,000 vehicles. In Spain, the Company has approximately 20 locations and a fleet of over 40,000 vehicles. The Company's fleet includes medium vans, small vans, large commercial vehicles, cars, buses and other vehicles. The Company serves customers from a range of industries, including construction, transport, commerce and support services. The Company also serves sectors, such as local authorities, manufacturing and engineering, public utilities, retailers and wholesalers. The Company's subsidiaries include Northgate (Europe) Limited, Northgate Vehicle Hire Limited and Northgate (AVR) Limited. more »

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Man Group Ltd, formerly Man Group PLC, is a United Kingdom-based independent investment management company. It offers long-only, alternative and private markets products on a single and multi-manager basis. Its investment management firms include Man AHL, Man Numeric, Man GLG, Man FRM and Man Global Private Markets (Man GPM). Man AHL is a diversified quantitative investment manager. Man Numeric is a quantitative equity manager invested across equity markets. Man GLG is a discretionary fund manager, active across alternative and long only strategies. Man FRM is an open architecture, full service hedge fund platform, which offers commingled fund of hedge funds, advisory solutions and outsourced research and consulting. Man GPM is engaged in private market asset classes, such as real estate, private credit and infrastructure. more »

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3 Comments on this Article show/hide all

43market 23rd May '13 1 of 3

Add trending indicators to ensure that the trend is in the direction you want it to be

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Scripophilist 7th Aug '13 2 of 3

Betfair is a curious one. They spent the years before floatation building a massive brand geared around not being a bookmaker and everybody lapped it up. It looked like Betfair were set to put all bookmakers out of business.

But curiously their strategy is now to be a bookmaker and the exchange betting side of the business has been firmly put in the background. New CEO comes in writes off money and focuses on exactly what the brand doesn't stand for.

Sure the first year after huge write downs earnings will be higher, but from then on it it's going to be a tough battle. Short term momentum yes, long term, not convinced at all with the current strategy.

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Scripophilist 13th Sep '13 3 of 3

One of the founders has now reduced his holding by 60% in the last two years.

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