Earnings Forecast Upgrades is a momentum strategy set out by US academics Phillip McKnight and Steven Todd in research that examined how analyst forecasts affect share prices. It focuses on finding momentum stocks by highlighting those that are receiving the highest levels of upgraded earnings forecasts from analysts. It looks at both the number of analysts that have raised their forecasts on a share over the past month, and the overall percentage earnings-per-share increase among the consensus of analysts. McKnight and Todd claimed: "Stocks with the greatest number of upwards revisions in earnings, net of downward revisions, earn significantly higher returns than otherwise similar stocks." The researchers examined a portfolio of European shares and found that the 20% with the highest net upward revisions outperformed the lowest 20% by over 16% a year. Earnings upgrades are one way of finding stocks with 'earnings momentum'; those that have received upward earnings revisions are likely to do so again in the future.
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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.
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And limited to the first 200 Results
| Returns |  |
 |
 |
 |
 |
 |
 |
FTSE 100 |
|---|---|---|---|---|---|---|---|---|
| 1 week | 2.2% | 0.8% | -2.6% | -3.4% | 0.1% | 3.0% | 2.8% | 2.6% |
| 1 month | 1.4% | 4.1% | -0.3% | 12.1% | -2.0% | 10.7% | -2.6% | 2.8% |
| 3 months | 11.0% | 10.2% | 15.8% | 11.6% | 12.4% | 17.5% | 8.2% | 0.6% |
| 6 months | 70.2% | 41.1% | 52.4% | 47.1% | 51.8% | 30.4% | 33.6% | 14.9% |
| 1 year | 85.3% | 76.2% | 116.7% | 57.6% | 139.5% | 54.1% | 25.7% | 18.4% |
| 2 years | -3.7% | -4.1% | 52.7% | 73.5% | 10.0% | 33.7% | -67.6% | -6.9% |
| Annualised | 12.1% | 10.2% | 6.5% | 29.7% | 14.5% | 15.5% | -11.2% | |
| Risks | ||||||||
| Max Drawdown | -63.7% | -58.0% | -60.8% | -37.3% | -80.1% | -36.6% | -83.3% | |
| Avg Holdings | 10.6 | 19.4 | 21.5 | 2.3 | 13.2 | 17.4 | 7.2 | |
| Diversification | Moderate | Good | Good | Low | Moderate | Good | Low | |
