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Earnings Downgrade Momentum Screen 200 Qualifying

Earnings Forecast Downgrades is a short selling and red flag strategy identified in a research paper by academics Philipp McKnight and Steven Todd, called Analyst Forecasts and the Cross Section of European Stock Returns. It looks for stocks experiencing earnings forecast downgrades by analysts as a potential trigger of negative momentum. They found that the positive returns from an earnings upgrade portfolio were large and persistent, whereas the sell portfolio generated a near zero return because bad news was quickly 'priced-in'. While the strategy on its own may be difficult to profit from, it still highlights stocks that should perhaps be avoided, or warrant careful additional research. McKnight and Todd wrote: "We find differences in the return continuation patterns of stocks with upward versus downward revisions, namely, bad news travels quickly, but good news travels slowly."

This is an independent study based upon the methods of...
Picture of Phillipp McKnight

Phillipp McKnight

American born financial theorist and university professor.

Analyst Forecasts and the Cross Section of European Stock Returns

by Philipp McKnight and Steven Todd

Research on European stock by Todd & McKnightwork found that the positive returns realized on a earnings upgrade portfolio were large and persistent, whereas the sell portfolio generated a near zero return, i.e. the bad news was quickly priced in whereas the good news diffused slowly. This may be because conflicts of interest encourage analysts to report overly optimistic earnings, and investors, aware of these biases, respond by being cynical and adopting a “wait-and-see” approach when it comes to good news.

This screen uses the following criteria:

  • % 1m EPS Upgrade FY2 < -5
  • # Downgrades (1m) > 1
  • # Downgrades (1m) > 1 * # 1m Upgrades
  • # Brokers > 3

Results are sorted by:

  • % 1m EPS Upgrade FY2 in ascending order


And limited to the first 200 Results


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Performance Tracking


Returns FTSE 100
1 week -1.4% -2.6% 0.3% - -1.0% -4.8% -1.6% 0.6%
1 month -2.1% -6.0% 32.8% - 5.1% -5.9% -0.9% -2.5%
3 months 4.7% 3.8% 51.2% -3.7% 7.4% -13.0% 10.6% 10.5%
6 months -9.1% -4.2% 34.1% -9.1% -7.5% -1.0% -6.6% 1.2%
1 year -6.2% -5.7% 35.4% -20.2% -8.1% -0.6% 8.8% 3.3%
2 years 12.9% 17.1% 89.1% 9.1% 0.8% 28.8% 45.1% 22.7%
Annualised 2.2% -6.4% 11.3% 1.7% 6.1% 10.6% 22.4%
 
Risks
Max Drawdown -50.9% -57.5% -49.9% -24.4% -32.2% -15.7% -25.7%
Avg Holdings 23.7 24.9 25 8.6 22.5 25 11.9
Diversification Good Good Good Moderate Good Good Moderate

 Studies based on equal weighted portfolios of max 25 stocks rebalanced quarterly. Qualifying shares below updated daily. Past performance not indicative of future returns.

 Please note that 'short selling' strategies are designed to underperform the market - they are best used for hedging long portfolios rather than for absolute negative returns.



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200 Qualifying

Ticker Name Mkt Cap £m % 1m EPS Upgrade FY2 # Downgrades (1m) # 1m Upgrades # Brokers Sector Flag
Subscriber Subscriber Telecoms United States
Subscriber Subscriber Energy United States
Subscriber Subscriber Consumer Cyclicals India
Subscriber Subscriber Basic Materials Australia
Subscriber Subscriber Energy United States
Subscriber Subscriber Technology United States
Subscriber Subscriber Basic Materials Germany
Subscriber Subscriber Basic Materials Germany