The First Cut: Positive Surprises With Below-Average P/Es

    by John Bajkowski

    The First Cut: Positive Surprises With Below Average P/Es Splash image

    When the markets are volatile, investors take comfort in stocks announcing better-than-expected earnings. Notably, contrarian investors have observed that positive surprises are even more dramatic events for value-oriented stocks since the surprise often triggers a change (for the better) in the market perception of a company.

    This issue’s First Cut screens for stocks with below-average forward price-earnings ratios (price divided by expected earnings per share) that have reported quarterly earnings that surpassed the consensus forecast—a positive earnings surprise.

    Changes in a stock’s price resulting from an earnings surprise may be immediate, but the surprise may also have a long-term price effect. This means that it may not be too late to buy into an attractive company after a better-than-expected earnings report is released. Studies indicate that the effect can persist for as long as a year after the announcement. Firms with a significant surprise also often have earnings surprises in subsequent quarters.

    The stocks that made this issue’s First Cut are exchange-listed companies tracked by at least four analysts that have had a significant positive quarterly surprise since the end of September 2007 with a forward price-earnings ratio below the average of all companies tracked by AAII’s Stock Investor Pro. These companies are also expected by analysts to have positive earnings for their current and following fiscal year, and they have not had downward quarterly or annual earnings estimate revisions during the past month.

    Only the top 30 stocks with the largest percentage surprise made the First Cut.

    The listing also includes the monthly percentage change in the consensus fiscal-year estimate to indicate how analysts have adjusted their near-term expectations, and the four-week and 52-week price changes to highlight investor reaction to the announcement.

    —John Bajkowski, AAII Vice President, Senior Financial Analyst


→ John Bajkowski