I have been banging the drum recently for using broker upgrades as a source of investing inspiration because tracking smart money in this way is a formula backed by pedigree academic research and real world success. Because it can take many months for the market to absorb upgraded earnings forecasts, there’s an opportunity to ride a wave of price momentum as more and more investors acknowledge the improving picture. In the UK, a strategy of buying shares with the highest number of recent upgrades has produced a return of 34% so far in 2013. With the recent launch of Stockopedia’s European Edition, it will be fascinating to see if those results can be reproduced by stocks across the Continent. Given that there is less broker coverage across Europe than in the UK, trading upgrades there could prove to be even more fruitful strategy in any economic recovery.
Mixing value and momentum
While both the FTSE 100 and FTSE Eurofirst 300 have both delivered impressive gains over 12 months – of 24% and 27% respectively – a lot of recent commentary has focused on the value opportunities available among European small caps. It was a point made in March by Erik Esselink, the manager of the Invesco’s Continental European Small Cap Equity Fund, who noted that while earnings prospects in European small caps had deteriorated slightly in some areas of the market, there were plenty of opportunities to find good companies trading at cheap valuations.
“Valuations in Europe continue to look favourable versus history and versus other regions in the world, however we think the risk of earnings disappointment continues to be high in the short term.” - Erik Esselink.
Tracking earnings upgrades is arguably a sensible way of filtering markets for those companies that brokers believe are on course to outperform rather than at risk of disappointing investors. In turn, by focusing on earnings upgrades and small cap stocks, it is also possible to create a blended strategy that applies both momentum and value, which research suggests are happy bedfellows. While it’s too early to garner any meaningful patterns from our recently launched European Earnings Upgrades screen, there are nevertheless some interesting small cap stocks currently qualifying.
What we are seeing now
Among them is Sweden-based TradeDoubler (TRAD), a £75 million market cap middleman…
