Earnings Momentum: Beating Analysts At Their Own Game

Wednesday, Mar 21 2012 by
Earnings Momentum Beating Analysts At Their Own Game

With company earnings season in full swing and London markets displaying signs of improving confidence, we thought we'd share the impressive performance of one of our Momentum screens, which tracks those companies that analysts think are poised for a surge in earnings. 

Of course, as we have discussed in the past, paying too much attention to what analysts have got to say about company stocks is fraught with risks. Broker recommendations (produced by in-house teams of analysts) on whether clients should buy, sell or hold stocks are widely reported in the media but the value of these recommendations is hotly debated. Indeed, research tends to suggest that stock pickers who follow broker recommendations too closely are on a hiding to nothing! 

However, amid the barrage of broker notes and reports, there are a few nuggets of information that can prove useful – earnings upgrades. Scrutinising the market for stocks that are attracting growing confidence among analysts is arguably a far more effective way of using all this information. To support that claim, our Earnings Upgrade Momentum Screen is currently flying – outperforming all of our 63 screens and up an astonishing 31.6% since last December against 11.1% for the FTSE 100.

The problem with brokers 

Among seasoned investors and academics alike, the issue of broker recommendations has a habit of dividing opinion. Research by Jegadeesh, Kim, Krische and Lee over the period 1985-1999 found that sell-side analysts rarely made strong-sell recommendations and this chimes with the theory that analysts have historically exhibited a strong upward bias. This is because most sell-side analysts work for brokerage houses which often have strong investment banking franchises, creating a potential conflict of interest when firms act as investment bankers to the companies their analysts cover. 

Since that research was conducted a raft of legislation has been introduced on both sides of the Atlantic – including the EU's Markets in Financials Instruments Directive (MiFID) – to try and fix the problem. Although this appears to have had some impact, recommendations have still remained relatively optimistic, with research by Jegadeesh and Kim in 2006 indicating that analyst recommendations retain a significant element of favourable bias

But hang on… 

Rather than scrutinising every word of broker recommendations, investors could do better by watching for when these analysts have a change…

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Mondi plc is a United Kingdom-based packaging and paper company. The Company is engaged in managing forests and producing pulp, paper and compound plastics for industrial and consumer packaging. The Company and Mondi Limited, under a dual listed company (DLC) structure, operate together as a single economic entity. The Company's business unit consists of Packaging Paper, which offers containerboard, sack kraft paper, specialty kraft paper and pulp; Fibre Packaging, which includes industrial bags, corrugated packaging and extrusion coatings; Consumer Packaging, which includes advanced films and components, consumer goods packaging and release liners, and Uncoated Fine Paper, which includes uncoated fine paper, pulp and newsprint. Through its subsidiary, Powerflute Group Holdings Oy, the Company operates a pulp and paper mill in Kuopio (Finland). more »

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ITV plc (ITV) is an integrated producer broadcaster (IPB) and creates, owns and distributes content on multiple platforms globally. The Company operates through two segments: Broadcast & Online and ITV Studios. The Broadcast & Online segment operates commercial channels in the United Kingdom (UK) and delivers content through linear television broadcasting and across multiple platforms. ITV also engages directly with consumers through subscription video on demand on the ITV Hub+, competitions, live events, gaming apps, merchandise and pay per view events, driving value from consumers' increasing willingness to engage with brands. The ITV Studios segment is the Company's international content business which creates and produces content in the UK and internationally across 12 countries. ITV Studios produces programming across a range of genres including drama, entertainment and factual entertainment for ITV's own channels in the UK and local broadcasters in the UK and globally. more »

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

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