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Tracking the Analysts

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by Wayne A. Thorp and John Bajkowski

The goal of active investing is to outperform the overall market. However, realistically, few investors are able to achieve this on a risk-adjusted basis over the long term. This is why passive investing and index mutual funds are so popular. Benjamin Graham understood the plight facing investors and put forth the idea that the only way to beat the market is to have a sound theory and then to have opinions and projections that are not only correct but also different from those of the market.

Even if you have a solid long-term investment approach, the market’s focus is sometimes more short-term in nature. Specifically, stock prices can move wildly during earnings season if a company exceeds or misses its quarterly “number,” or earnings estimate. Short-term expectations play a key role in determining if a stock’s price “gains” or “loses” when a company reports its actual earnings.

Despite having a somewhat short-term bias, the market is forward-looking. Stock prices are established through expectations; as these expectations change or are proven wrong, the price adjusts. Earnings per share (EPS) estimates are forged by the interaction of many company, industry and economic forces. These estimates embody an analyst’s opinion of factors such as sales growth, product demand, competitive industry environment, profit margins and cost controls. Earnings play a key role in valuing stocks, and even slight changes in expectations for future earnings or the projected earnings growth rate can have a significant impact on a stock’s price.

Services such as I/B/E/S, FirstCall and Zacks Investment Research are some of the key players, providing consensus earnings estimates by tracking the estimates of tens of thousands of investment analysts around the globe. Tracking these expectations, and their changes, is an important and potentially rewarding strategy for stock investors.

Brokerage Analysts

Services tracking earnings estimates normally track the expectations of approximately 5,000 “sell-side” analysts following U.S. stocks. A sell-side analyst works for a broker or a firm that manages individual accounts and makes recommendations to the clients of the firm—the firms “sell” stocks to their customers. In contrast, a buy-side analyst usually works for a pension fund or mutual fund company; these analysts perform research and make recommendations to the money managers of the fund that employs them.

The two primary functions of a sell-side analyst are to make earnings estimates and to provide buy/hold/sell investment recommendations on stocks. Historically, brokerage firms use the research developed by their analysts to retain brokerage customers and to create investment banking opportunities. However, in the wake of Regulation FD (fair disclosure of security information) and the Sarbanes-Oxley Act (corporate responsibility reforms), the role of the sell-side analyst has become more focused on information dissemination.

Consensus Estimates

Stocks with earnings estimates may have one to 50 analysts following and analyzing them. The consensus estimate refers to the average EPS estimate derived from the individual estimates provided by the analysts following a firm.

Stock Investor Pro, AAII’s fundamental stock screening and research database program, uses I/B/E/S (owned by Thomson Reuters) as its source for consensus earnings estimates. Of the 10,017 stocks in the program as of April 20, 2012, 3,957 have current fiscal-year earnings estimates. This is a decline of almost 25% over the last 12 years. Furthermore, nearly 15% of these firms are tracked by only one analyst, bringing into question the term “consensus.” One of the unintended consequences of legislation intended to level the playing field for all investors has been a decline in analyst coverage, especially of smaller firms. This was further exacerbated by the financial crisis of 2007 and 2008, where the collapse of Bear Stearns and Lehman Brothers eliminated a number of sell-side analysts. Data from FactSet published in June 2009 shows that between September 2008 and May 2009, more than 25% of all sell-side research reports on all small-cap companies announced that a sell-side analyst was dropping coverage of the company. By comparison, only 6.4% of small-cap research reports announced dropped coverage between September 2006 and mid-May 2007.

Furthermore, studies have indicated that the accuracy of analyst forecasts has also declined. In their paper “Who is Afraid of Reg FD? The Behavior and Performance of Sell-Side Analysts Following the SEC’s Fair Disclosure Rules” (Journal of Business, November 2006), Anup Agrawal, Sahiba Chadha and Mark Chen examined earnings forecasts from March 1995 to June 2004 and concluded that:

  • The accuracy of both individual analyst and consensus earnings forecasts decreased since the implementation of Regulation FD. The decline in forecast accuracy is magnified for small companies.
  • The dispersions of individual analyst earnings forecasts for specific companies have increased since the implementation of Regulation FD.

Figure 1 provides a screenshot of the earnings estimates for Google Inc. (GOOG) from Stock Investor Pro 4.0. The consensus earnings estimate for Google’s current quarter ending June 2012 is $10.193. For the current fiscal year ending December 2012, analysts are expecting earnings of $43.413 per share. Often, analysts also provide a three- to five-year annual earnings growth rate estimate, which for Google is 17.693%.

The high and low estimates provide a feel for the range of analyst opinion for a given company. For Google’s current fiscal year, the range covers a low of $41.630 and a high of $47.890. The long-term growth rate estimates range from 13.300% to 30.000%. The standard deviation also provides a statistical measure of the dispersion of the earnings estimates. Google’s standard deviation is $1.078 for the current fiscal year.

The number of estimates offers an indication as to the depth of coverage for a company. Thirty-nine analysts are providing an estimate for the current fiscal year. This is among the highest number of analysts in the Stock Investor Pro database. On average, eight analysts are providing current year estimates for each firm in the database with estimates. The median, or midpoint, number of analysts providing estimates for the current fiscal year is six.

When using earnings estimates, the first rule to keep in mind is that the current price usually reflects the consensus earnings estimate. Therefore, there is nothing to be gained by screening simply for high levels of expected earnings growth. Furthermore, studies show that, over the long term, stocks with high expected earnings growth tend to underperform stocks with low growth rates and low expectations. This is because it is difficult to meet and exceed high expectations over an extended period of time. In pursuing a screening and an investment strategy based on earnings estimates, it is best to focus on earnings surprises and revisions.

Earnings Surprises

It is not uncommon to see prices decline even when companies report an earnings increase from the previous reporting period. This often happens because, while the actual earnings represent an increase, the increase is not as large as the market was expecting. Earnings surprises occur when a company reports actual earnings that differ from consensus earnings estimates (either above or below).

Exchange-listed companies are required to file quarterly reports with the Securities and Exchange Commission (SEC) within 45 days of their fiscal quarter end. However, many companies announce their quarterly results within one month of the period end.

The fiscal quarterly periods for most companies coincide with the calendar quarters. The “earnings season” is typically a frenzied three-week period starting mid-month each January, April, July and October as major companies report their results from the previous quarter. During the earnings reporting season, financial news outlets provide daily reports on earnings announcements, with companies that show significant earnings surprises receiving particular attention.

Positive earnings surprises occur when actual reported earnings are above the forecasted earnings per share. Negative earnings surprises occur when reported earnings are below the earnings expectations. The stock prices of firms with significant positive earnings surprises show subsequent above-average performance, while those with large negative surprises tend to have below-average price performance.

Measuring an Earnings Surprise

Not all earnings surprises are created equal, and there are a number of ways to measure the significance of an earnings surprise. In Figure 1, you can see information about Google’s latest quarterly earnings announcement, shown above the earnings estimate grid.

Google announced its March quarter-ending earnings on April 12, 2012. At the time of the announcement, the consensus estimate was $9.654 per share, but actual quarterly earnings turned out to be $10.080 per share—a nearly $0.43 per share positive surprise. It is difficult to gauge the significance of an earnings surprise without comparing it to some base figure. One popular measure calculates the percentage difference between the consensus estimates and the actual reported earnings (i.e., reported EPS minus estimated EPS, divided by the estimated EPS). For Google, the percent surprise is 4.4%:

Surprise % = (actual EPS – EPS estimate) ÷ EPS estimate = ($10.080 – $9.654) ÷ $9.654 = 0.044, or 4.4%

Another popular technique used to measure earnings surprises is the standardized unexpected earnings SUE score. An earnings surprise is considered more significant if it is far outside the statistical range of estimates expected at the time of the announcement. The SUE score makes use of the standard deviation of expected earnings. The standard deviation of Google’s quarterly estimate was $0.38 on April 12, 2012. The resulting SUE score for Google’s surprise was a modest 1.1.

SUE Score = (actual EPS – EPS estimate ÷ standard deviation
= ($10.080 – $9.654) ÷ $0.38
= 1.1

Google’s positive surprise of $0.43 was just outside the $0.38 standard deviation and, based on its post-announcement price reaction, was apparently a bit of a disappointment (the company also missed the projected revenue target for the quarter). Google announced earnings after the market close on April 12 and its price fell on five of the six following trading days, losing more than 8%, while the market was only slightly negative over the same period (Figure 2).

In contrast, on April 18 eBay Inc. (EBAY) announced quarterly earnings of $0.550 for the period ending March 31. This was “only” three cents above the $0.517 consensus estimate but represented a more significant 6.4% surprise and a more meaningful 3.3 SUE score (Figure 3). As the price chart in Figure 4 indicates, this significant positive earnings surprise sparked a 13.2% increase following the after-market announcement on April 18.

Surprise Impact

As our examples show, changes in stock price resulting from an earnings surprise can occur immediately. However, the surprise can also have a lingering long-term effect as well. While many investors might find it difficult to rationalize buying eBay following a 13% price jump, academic studies indicate that the effect of a positive earnings surprise can persist for as long as a year after the announcement.

This means that it may not make sense to buy a stock after the initial price decline following a negative earnings surprise. There is a good chance that the stock price will continue to underperform the market for some time. Also, this means it may not be too late to buy into an attractive company after a better-than-expected earnings announcement.

One explanation as to why earnings surprises can have a long-term impact on stock prices is that significant earnings surprises are often followed by others in subsequent quarters. Often when a firm has a surprise, it is a sign that similar surprises will follow. This is sometimes referred to as the “cockroach effect”—you rarely see just one earnings surprise.

Since both positive and negative earnings surprises have lingering long-term effects on stock prices, a rewarding investment strategy is one that avoids stocks you believe will have negative earnings surprises or those that have already had negative earnings surprises. Similarly, selecting positive earnings surprise stocks before and even after the earnings announcement may be profitable. Even a strategy of simply selling after negative earnings surprises and buying after positive earnings surprises probably has some merit.

A Contrarian View of Estimates & Surprises

An article in the September/October 1999 issue of Computerized Investing profiled the investment philosophy of David Dreman, chairman of Dreman Value Management. Dreman has spent a career studying the psychological underpinnings of the overall stock market and their impact upon valuation levels. He has written a series of books on contrarian investment strategies, the latest being “Contrarian Investment Strategies: The Psychological Edge” (Free Press, January 2012). In his 1998 book, “Contrarian Investment Strategies: The Next Generation” (Simon & Schuster), Dreman devotes a considerable amount of space to examining earnings estimates and surprises and their effect upon stock price.

Based on a study of quarterly earnings estimates, Dreman found an average error of 44% annually. Only 29% of the estimates were within plus or minus 5% of the actual earnings announcement; 47% were within 10% plus or minus of the actual earnings figure; and 58% were within a 15% plus or minus band. His findings suggest that there is a high probability that you will experience an earnings surprise for a company that you own.

Dreman found that errors in analysts’ forecasts were high across a wide range of industry groups. Companies in industries with high visibility and high growth were seen to have as many errors as other firms had.

Dreman’s studies found that analyst forecasts tend to be overly optimistic. About a quarter of the surprises were positive surprises, while over three-quarters of them turned out to be negative surprises. Unexpectedly, the tendency toward over-optimism did not vary significantly during periods of expansion or recession. Analysts tend to be overconfident of their forecasting abilities—typically making last-minute adjustments to their forecasts, yet still missing the mark.

Historically, it has been observed that analysts have a tendency to start the year with a high annual EPS forecast and then reduce the estimate as the year goes forward. This upward bias was especially high when there was an investment banking relationship between an analyst’s firm and the company under analysis. A study of analyst revisions of stocks in the S&P 500 found that earnings estimates tend to be revised downward 12.9% on average during the course of the fiscal year, with about a 6.3% adjustment in the first six months and a 19.2% adjustment in the second half of the year.

More recent studies indicate that this positive bias may have been reduced and possibly reversed, at least for quarterly forecasts. Companies understand the potential impact on stock price of a positive earnings surprise and occasionally try to guide analysts into positive quarterly surprises. With greater emphasis being placed on tracking quarterly earnings announcements, the current thinking is that annual forecasts tend to be more objective, while quarterly forecasts come under greater pressure for low-balling.

Whisper Numbers

To this point, our discussion of earnings estimates has focused on those tracked by the likes of Zacks and FirstCall and published in a myriad of financial publications and websites. However, there is another type of earnings number that garners attention during earnings season—whisper numbers, or whisper earnings. Whisper earnings, or whispers, are considered the actual earnings expectations of the analysts tracking the company—free of any company influence. These “actual” estimates are passed (whispered) from analyst to analyst, but not actually posted to estimate tracking services. Prior to Regulation FD, which bars selective disclosure by brokerage firms, it was common practice for analysts to share these whisper numbers with their best clients.

Even with the passage of full disclosure rules, whisper numbers have not disappeared from the financial landscape, with several websites still tracking them. It is still not uncommon for a company to meet or even exceed its consensus estimate only to see its stock price plummet because it did not meet its whisper number.

Sources of Consensus Earnings Estimates
Most investing websites providing data on stocks will have basic consensus earnings estimate data. The following sites serve as the primary sources for these estimates.
Zacks Investment Research
Sources for Whisper Estimates

A 1998 study published by Susan Watts of Purdue University, Mark Bagnoli of the University of Michigan, and Messod Daniel Benish of Indiana University looked at both traditional consensus estimates and whisper numbers. While they found that consensus earnings tend to understate actual earnings, they also found that whisper numbers tend to overestimate earnings by almost five cents per share. The researchers concluded that whisper numbers “undo” the conservative bias that consensus earnings have. They further indicated that whisper numbers appear to better reflect the market’s expectations of earnings.

In the past, whisper numbers came from professionals on Wall Street and were circulated among them and given to top brokerage clients. While the SEC has taken steps to prevent selective disclosure of analyst research, whisper numbers are still a topic of much discussion each earnings season. While some services still claim to report the whisper numbers of street professionals, a new whisper number has emerged in the post-Sarbanes-Oxley marketplace that reflects the expectations of investors as a whole. This data is often culled from financial message boards and social media outlets and creates an alternate set of expectations for a company.

No matter the source of whisper numbers, it is important not to merely take them at face value. On April 19, 2012, WhisperNumber.com and EarningsWhisper.com were both reporting a whisper number for McDonald’s Corp. (MCD) of $1.28, five cents ahead of the analyst consensus of $1.23 (Figure 5). The next day, however, the company reported earnings that were in line with the analyst consensus, and the stock price rose nearly 0.70% on a day when the S&P 500 rose slightly more than 0.1%.

Table 1 provides information on additional sources for whisper numbers.

Profiting From Surprises

If we accept that earnings surprises are inevitable, is there a way for investors to take advantage of them? Dreman’s contrarian approach to taking advantage of the high rate of analyst forecast errors is to simply invest in out-of-favor stocks.

There are times when the market seems willing to accept any price—no matter how high—for a company with great growth prospects. Hindsight has even shown that the market is willing to overpay for companies with questionable growth prospects or even none at all. These high expectations lead to high multiples of price to earnings, book value, cash flow, and dividends. However, high multiples can act as a double-edged sword. Investors are willing to pay a higher stock price for a current level of earnings because they expect earnings to grow more strongly in the future. If expectations of future prospects increase, investors will accept a higher multiple of price to current earnings. A high growth stock that exceeds expectations can get a large price boost because of an expansion of the multiple and the higher current earnings figure. The real risk, however, lies in an earnings disappointment. If this occurs, a tremendous price decline can ensue if investors view the negative surprise as a reason to adjust their expected growth rates and corresponding multiples downward.

In his studies of earnings surprises, Dreman found that stocks with low price-earnings ratios reacted more strongly to positive earnings surprises than did high price-earnings ratio stocks. As it turns out, a positive earnings surprise for a stock with high expectations (as measured by factors such as high price-earnings ratios) is not truly a surprise. It is merely a reinforcing event that does not change perceptions about a stock.

Positive earnings surprises for out-of-favor stocks, however, are perceived by the market as significant events. Dreman terms them “event triggers” because they initiate a perceptual change among investors.

The impact of a negative earnings surprise is reversed. Out-of-favor stocks barely flinch, while highly favored stocks generally experience significant declines. With out-of-favor stocks, negative surprises reinforce the current perception and do not lead to reevaluations. However, negative earnings surprises are event triggers for highly valued stocks that typically lead to a downward revaluation of the firm’s prospects, and a steep decline in stock price.

Based on Dreman’s, “Contrarian Investment Strategies: The Next Generation,” AAII developed a contrarian screen with an additional upward earnings revisions element. As Figure 6 reveals, adding earnings revisions to the Dreman contrarian screen has had a significant positive impact on performance, especially over the last few years. Table 2 lists the companies passing the Dreman With Estimate Revisions screen as of April 20, 2012. Additional information on the Dreman With Estimate Revisions screen can be found at the Stock Screens area of AAII.com (www.aaii.com/stock-screens).

Company Name (Ticker) P/E
Liab to
EPS Estimates
($ Mil)
Generac Holdings (GNRC) 5.0 2.07 0.0 50.5 0.6 59.5 4.79 2.536 2.715 1,611.4 generators
Lear Corp. (LEA) 8.5 1.84 1.3 65.2 1.9 20.6 5.08 5.120 5.554 4,208.9 auto seats & electric
Coventry Health Care (CVH) 9.1 1.05 1.5 48.8 1.4 12.2 3.70 3.261 3.513 4,762.9 managed health care
ProAssurance Corp. (PRA) 9.3 1.22 1.2 56.7 14.3 9.31 7.100 6.739 2,663.1 insurance holding co
KBR, Inc. (KBR) 10.9 2.04 0.6 56.0 1.7 19.5 3.17 2.666 3.150 5,099.6 engineering & servs
Bancolombia S.A. (ADR) (CIB) 11.0 2.74 2.3 89.5 0.1 26.2 4.49 4.839 5.549 8,205.3 financial prods & servs
Bunge Limited (BG) 11.0 0.88 1.5 49.7 2.3 7.8 5.85 6.727 7.385 9,666.4 agribusiness & food
Microsoft Corp. (MSFT) 11.8 3.97 2.5 41.8 0.7 37.5 2.69 2.690 3.017 272,356.1 software prods & servs
Reliance Steel & Aluminum (RS) 11.9 1.30 1.1 43.9 1.5 11.3 4.58 5.623 6.501 4,083.9 metals serv centers
Cummins Inc. (CMI) 12.1 4.03 1.4 52.9 1.6 35.7 9.55 10.391 11.754 22,298.7 diesel & gas engines
UnitedHealth Group (UNH) 12.4 2.19 1.1 60.3 18.5 4.73 4.879 5.486 62,185.8 diversified health co
Liberty Media Corp. (Capital) (LMCA) 12.4 1.82 0.0 31.9 0.3 15.6 6.64 2.881 3.446 10,406.0 media & entertain
WuXi PharmaTech (Cayman) (WX) 12.7 1.94 0.0 23.9 0.7 17.6 1.07 1.203 1.347 973.5 med lab outsourcing
Telephone & Data Systems (TDS) 12.8 0.64 2.1 51.7 0.6 9.6 1.68 1.575 1.460 2,542.8 telecom servs
EnerSys (ENS) 13.0 1.67 0.0 47.4 1.2 13.2 2.27 2.908 3.193 1,607.0 industrial batteries

Reversion to the Mean

As the reporting period approaches, estimates normally converge toward the consensus. Even among Wall Street analysts there is a “herd mentality”; many like the comfort of being near the consensus and are too conservative when issuing outlying forecasts.

Most investors also dismiss outlying forecasts too quickly and underestimate the probability of perceived unlikely events.

While free earnings estimate services do not reveal the analysts behind the estimates, the premium services often do. When researching a firm with a wide discrepancy in earnings forecasts, it would be prudent to try to determine why there is a high degree of uncertainty in the earnings forecast.

Estimate Revisions

Changes in estimates reflect changes in expectations of future performance. Perhaps the economic outlook is better than previously expected, or maybe a new product is selling better than anticipated. Changes in individual analyst estimates away from the consensus average are especially noteworthy and more meaningful than revisions toward the mean. Revisions are often precursors to earnings surprises. A flurry of revisions near the reporting period can indicate that analysts missed the mark and are scrambling to improve their estimates.

Revisions to earnings estimates lead to price adjustments similar to earnings surprises. When earnings estimates are revised significantly upward—5% or more—stocks tend to show above-average performance. Stock prices of firms with downward revisions show below-average performance after the adjustment.

Companies like to report positive earnings surprises, so it is not surprising that many companies try to “guide” the estimates slightly downward to create a positive quarterly surprise. Interestingly, estimates for the fiscal year do not tend to show the same positive surprise bias.

Tracking Revisions

Referring back to Figure 1, Stock Investor Pro reports a history of recent analyst revisions to earnings estimates along with the current estimates. For the week ending April 20, 2012, Google’s consensus annual earnings forecast for its current fiscal year was $43.413 per share. This represents a nearly $1.10 increase from the previous month’s average estimate of $42.315.

Thirty-nine analysts are providing current fiscal-year estimates for Google. Over the course of the month, 37 analysts raised their fiscal year forecasts, while three analysts lowered their estimates (which means some analysts raised and lowered their estimate over the course of the last month).

Over the last three months, the consensus forecast decreased by 47 cents from $43.886 three months ago to $43.413.

The significance of these changes can be measured through a percentage change of the forecast, or the net number of analyst changes.

The percentage change is calculated in a similar fashion to percent surprise. A positive revision percentage is considered bullish, while a negative figure may be a bearish signal. The percentage change over the last month in the consensus estimate for Google’s current fiscal year is calculated as follows:

Revision % = (current estimate – prior estimate) ÷ prior estimate
= ($43.413 – $42.315) ÷ $42.315
= 0.026, or 2.6%

The net number of analyst revisions is often referred to as “diffusion.” Diffusion is the comparison of the number of up and down EPS estimate revisions to the total number of analysts following the stock. A bullish signal would be provided by a larger number of analysts increasing estimates than the number lowering estimates. Google has very strong positive diffusion of 87.2%.

Diffusion = (# rev up – # rev down) ÷total # estimates
= (37 – 3) ÷ 39
= 0.872, or 87.2%

Screening for Revisions

AAII created two screens that look for earnings revisions: one that looks for upward revisions in annual earnings estimates and another that screens for companies with downward revisions. AAII’s Stock Investor Pro, which contains consensus earnings estimates from I/B/E/S, was used to perform our screens.

The first screen filters out those firms with less than four estimates for the current fiscal year. This filter helps to ensure that revisions actually reflect a change in general consensus, not just a change by one or two analysts. However, requiring a stock to have at least four analysts reporting earnings estimates will knock out most of the very-small-capitalization stocks.

For the upward revision screen, the next filter requires that the firm show upward changes over the course of the last month in its consensus estimates for the current and next fiscal years. We also screen to make sure no analysts lowered estimates for the current or next fiscal year during the past month.

Company Name (Ticker) Current Fiscal Year No
Ago Est
Conceptus, Inc. (CPTS) 31-Dec-12 0.032 0.019 68.4 0.14 -0.07 12 0 1 women’s health care
Mueller Water Prods (MWA) 30-Sep-12 -0.034 -0.057 40.4 0.01 -0.09 7 0 3 water treatment prods
Frontline Ltd. (USA) (FRO) 31-Dec-12 -1.097 -1.625 32.5 -0.06 -2.45 11 0 4 oil tankers
WisdomTree Investments (WETF) 31-Dec-12 0.107 0.082 30.5 0.14 0.08 6 0 4 ETFs; asset mgmt
MDC Partners Inc. (USA) (MDCA) 31-Dec-12 -0.273 -0.384 28.9 0.20 -0.65 7 0 4 marketing servs
Aon PLC (AON) 31-Dec-12 4.395 3.608 21.8 4.60 4.23 10 0 9 risk mgmt; insurance
Hovnanian Enterprises (HOV) 31-Oct-12 -1.018 -1.293 21.3 -0.50 -1.28 6 0 2 oil & gas well drilling
Charming Shoppes (CHRS) 31-Jan-13 0.258 0.215 20.0 0.35 0.20 5 0 1 retail specialty apparel
Zipcar Inc. (ZIP) 31-Dec-12 0.138 0.115 20.0 0.29 0.08 8 0 1 car sharing network
Coinstar, Inc. (CSTR) 31-Dec-12 4.694 4.089 14.8 5.46 4.14 14 0 12 automated retail (Redbox)
Acacia Research Corp. (ACTG) 31-Dec-12 2.054 1.791 14.7 3.23 1.46 7 0 2 licensing of patents
Lindsay Corp. (LNN) 31-Aug-12 3.648 3.216 13.4 3.87 3.42 8 0 9 irrigation & infrastructure
Cytec Industries Inc. (CYT) 31-Dec-12 4.567 4.038 13.1 4.95 4.07 6 0 5 specialty chemicals
Robbins & Myers (RBN) 31-Aug-12 3.548 3.211 10.5 3.65 3.49 10 0 10 engineered equip
Mitcham Industries (MIND) 31-Jan-13 2.604 2.362 10.2 2.90 2.44 5 0 5 mobile entertain content
THQ Inc. (THQI) 31-Mar-12 -1.529 -1.690 9.5 -1.36 -1.77 12 0 7 gaming software
Cost Plus, Inc. (CPWM) 31-Jan-13 1.143 1.045 9.4 1.21 1.10 6 0 6 retail furniture
Georgia Gulf Corp. (GGC) 31-Dec-12 2.579 2.369 8.9 3.10 1.88 6 0 2 chlorovinyls & aromatics
Apartment Investment & Mgt (AIV) 31-Dec-12 -0.998 -1.092 8.6 -0.52 -1.59 6 0 2 REIT
Westinghouse Air Brake Tech (WAB) 31-Dec-12 4.714 4.374 7.8 5.00 4.30 10 0 6 equip for rail indus
United Rentals, Inc. (URI) 31-Dec-12 3.255 3.034 7.3 3.72 2.41 13 0 5 equip rental hold’g co
First Financial Holdings (FFCH) 30-Sep-12 0.552 0.515 7.2 0.65 0.42 6 0 1 savings & loan hold’g co
Energy Partners, Ltd. (EPL) 31-Dec-12 2.069 1.934 7.0 2.17 1.92 5 0 3 oil & natural gas
Och-Ziff Capital Mgmt (OZM) 31-Dec-12 1.257 1.185 6.1 1.53 1.07 9 0 5 institutional asset mgmt
DXP Enterprises, Inc. (DXPE) 31-Dec-12 2.740 2.585 6.0 2.95 2.43 5 0 1 distrib equip to industry
Synta Pharmaceuticals (SNTA) 31-Dec-12 -0.956 -1.016 5.9 -0.80 -1.15 7 0 1 biopharmaceuticals
ProAssurance Corp. (PRA) 31-Dec-12 7.100 6.720 5.7 8.40 5.80 5 0 2 insurance holding co.
Owens-Illinois, Inc. (OI) 31-Dec-12 2.919 2.767 5.5 3.15 2.75 14 0 12 glass containers
PacWest Bancorp (PACW) 31-Dec-12 1.706 1.617 5.5 1.90 1.55 8 0 4 bank holding co
Par Pharmaceutical Cos (PRX) 31-Dec-12 3.723 3.541 5.1 4.88 3.42 12 0 4 drug holding co

Definitions of Screens and Terms

Ending Date: The ending date for the current fiscal year.

Current Estimate ($): The consensus of analysts’ estimates for earnings per share for the company’s current fiscal year as tracked by I/B/E/S. The average estimate is reported, and it reflects the earnings expectations built into the stock price.

Month Ago Estimate ($): The average EPS estimate for the current fiscal year from one month ago. When compared against the current estimate, it provides a feel for the recent change in the earnings expectations for a given company.

Monthly Change (%): The percentage change in the consensus earnings estimate over the last month. Prices of firms with positive revisions tend to perform better than those of firms with downward revisions.

High Estimate ($): The highest EPS estimate for the company’s current fiscal year. When compared with the lowest estimate, it provides an indication of the level of consensus among the analysts tracking the stock. The wider the range, the greater the divergence in opinion and the greater the chance for an earnings surprise.

Low Estimate ($): The lowest EPS estimate for the company’s current fiscal year. When compared with the highest estimate, it provides an indication of the level of consensus among the analysts tracking the stock. The wider the range, the greater the divergence in opinion and the greater the chance for an earnings surprise.

No. of Estimates (X): The number of analysts providing an earnings estimate for the current fiscal year. Indicates how widely a firm is followed. Widely followed firms tend to react more quickly to estimate revisions.

Monthly Revisions—Revs Up (X): The number of analysts who revised their earnings per share estimate upward for the company during the last month. When compared to the total number of analysts issuing estimates, it provides an indication of strength of an earnings revision.

Monthly Revisions—Revs Down (X): The number of analysts who revised their earnings per share estimate downward for the company during the last month. When compared to the total number of analysts issuing estimates, it provides an indication of strength of an earnings revision.

The screen for companies with downward EPS estimate revisions simply reverses the elements of the upward revision screen. It looks for firms with decreases in annual fiscal-year estimates for the current and next years, coupled with no upward revisions.

The portfolios that these screens produced, however, would be difficult for most individual investors to duplicate. The upward revision portfolio averaged 178 stocks, with only 19.3% of companies surviving the rebalancing from one month to the next. The downward revision screen averaged 213 stocks, with 20.8% of the stocks making it from one month to the next. The positive revision screen had as many as 413 companies pass the filter and as few as 28 passing companies for a given month. The downward revisions screen ranged from 79 to 646 passing companies.

To help create more manageable portfolios, we retested the revision strategies requiring at least a 5% revision (increase or decrease) over the last month. This new requirement dramatically increased the performance for upward revisions over the test period while generally creating more manageable (smaller) portfolios.

The performance of the upward and downward revision screens as well as the 5% upward and downward revision screens is presented in Figure 7 for the period from January 1, 1998 through March 31, 2012. From this data, we see that adding the minimum 5% upward revision requirement upped the average annual price change from 16.8% to 29.3%. Even on a risk-adjusted basis, the Est Rev: Up 5% screen bested the Est Rev: Up screen: 18.4% per year to 14.1% per year, respectively. The average number of portfolio holdings for the Est Rev screens decreased from 178 to 45. Not surprising, turnover increased: Only 7.9% of the stocks made it from one month to the next for the Est Rev: Up 5% screen.

Table 3 shows the 30 firms with the largest upward monthly percentage revisions for the current fiscal year as of April 20, 2012. For passing company listings for all our estimate revisions screens, visit the Stock Screens area of AAII.com.

Whenever your filter involves the percentage change of a variable, there is a risk that firms with very small base numbers will dominate: A change from one cent to nine cents is a 900% change. Therefore, when working with percentage changes, it is helpful to use an additional screen to confirm the significance of the change.

The number of estimates for each firm is shown in the table to help gauge the interest in the firm and the meaningfulness of the overall estimates. Typically, the larger the firm, the greater the number of analysts that track it.

The number of upward revisions indicates how many analysts have revised their estimates in the last month. When compared to the number of analysts making estimates, this is a confirmation of the significance of the percentage change in estimates. You can put more faith in a revision if a large percentage of the analysts tracking a firm have revised their estimates.

Examining the range of estimates provides an indication of the consensus within the group. A wide range of estimates would point to great disagreement among analysts, indicating greater uncertainty and greater chance for an earnings surprise. The subsequent price move can be more dramatic, however, if an earnings surprise occurs for a firm with a very tight range of earnings estimates. Firms with tight ranges of estimates will normally have higher SUE scores when there is a surprise.


Earnings estimates are an important element for investors to keep in mind as they analyze and select stocks. They are a numerical view of expectations, and changing expectations drive stock prices.

Even though earnings surprises and revisions are widely used by investors, they continue to highlight stocks worthy of further analysis.

Table 4 summarizes the main points to keep in mind when dealing with consensus earnings estimates.

Table 4. Using Consensus Earnings Estimates

Earnings Estimates

  • Firms with high expected earnings growth tend to underperform the market because it is difficult to live up to the market’s high expectations. Companies with low expectations tend to do better than expected because the bar has been set so low.
  • Realize that the stock price already reflects the general consensus about future earnings. Be aware that if a stock is highly touted, the basis for the recommendation should be an earnings forecast significantly above the prevailing opinion.

Earnings Estimate Revisions

  • Stock prices of firms with significant upward revisions (5% or more) generally outperform the market. Firms with significant downward revisions generally underperform the market.
  • Earnings revisions are often a precursor to earnings surprises. Stock prices typically react positively to upward revisions.

Earnings Surprises

  • Stock prices of firms that significantly exceed their earnings expectations (positive earnings surprise) tend to outperform the market, while those with negative earnings surprises generally underperform.
  • The effect of an earnings surprise—positive or negative—is long lasting. The greatest effect of the surprise can be felt immediately, but the effect of the earnings surprise can be seen for as long as a year. The effect of the surprise tends to be longer lasting for negative earnings surprises.
  • The stock prices of large firms adjust to surprises more quickly than those of small(er) firms.
  • Companies with low multiples to earnings, book value, or sales generally react more strongly to positive earnings surprises than companies with high multiples. However, companies with high multiples typically react more strongly to negative surprises.
  • Earnings surprises often follow in groups—the “cockroach effect.”
  • The chance of an earnings surprise is greater if the range of estimates for a company is wide prior to the announcement. The price move can be more dramatic, however, if an earnings surprise occurs for a firm with a very tight range of earnings estimates.


Joel from CT posted over 6 years ago:

Interesting article showing how difficult investing and stock analysis for individuals really is and why I use mostly index funds any long term investments but prefer short term trading based on technical analysis.
I find it exasperating when a company works hard, reports increased sales and earning but misses an analysts estimate by one penny and the stock takes a big loss. I think the analyst should be fired!! If the company does poorly the stock should go down but the stock should not go down just because some little analyst guessed wrong.
It is funny to see some analyst forecast earnings to 3 decimal places.....really???

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