The First Cut: Revised Earnings Estimates
Earnings are a key variable used to value stocks. Slight changes in expectations of future earnings or the earnings growth rate normally translate into a significant and lasting impact on stock prices.
Services such as I/B/E/S and Reuters calculate consensus earnings estimates by tracking the estimates of thousands of analysts. Keep in mind that the current price usually reflects the consensus earnings estimate. However, tracking significant revisions to these consensus estimates can be a rewarding investment strategy.
While the price impact of the revision can be felt immediately, the effect of a revision can take up to year to be fully reflected in the price. Not surprisingly, large firms tend to adjust to revisions more quickly than small firms.
The stocks that passed this issues First Cut are exchange-listed stocks with positive historical and expected earnings per share, that are tracked by at least four analysts and that within the past month have had an upward revision of their consensus mean estimates for the current and next fiscal year. The screen also requires that no analysts lowered their estimates for the current or next fiscal year during the past month.
Only the top 30 stocks with the largest percentage change over the last month for next years expected earnings per share forecast made the First Cut.
The First Cut listing also provides the range of estimates for the next fiscal year, the number of analysts providing estimates for next year, and the number of analysts that revised their estimate upward during the past month.
Keep in mind that an upward revision is not a reason alone to buy a stock, but it may serve as pointer to companies with better than originally anticipated prospects that merit further analysis.
AAII Vice President, Senior Financial Analyst