A low standard deviation means that analysts are tightly clustered in their view on what a company should earn, making a surprise all the more. On Stockopedia PRO, of course! Sign up now for access to our exclusive Beta!Īnother possible screen criterion that may be worth adding is that the standard deviation of estimates is below industry average. This result indicates that UK investors are able to differentiate the information contained in forecast revisions and earnings surprisesquot. Quot Earnings surprises appear to have positive and significant explanatory power for abnormal share return only after controlling for forecast revisions. However, the research found that UK investors place a much higher weight on forecast revisions than earnings surprises when valuing their investing firms, indicating that they do not fixate on earnings surprises. 2.3% in the US, and even higher for beating earnings expectations (7.7%+ vs. Research on the UK market found a similar premium for firms that meet or beat analysts’ forecasts (i.e. They found that, just as the top 20% of stocks in terms of upside earnings surprises outperformed the broader market by 3% over six months, the top 20% in terms of sales surprises outperformed by 2.6% and a cross sample of the two actually outperformed the market by 5.3% (i.e. In a recent 2006 paper, “ Revenue Surprises and Stock Returns”, Jegadeesh and Livnat looked at both earnings and revenue surprises. Market capitalisation below median – Research shows that large firms tend to adjust to surprises more quickly than small firms do (they have higher institutional ownership, so they are tracked by more analysts and portfolio managers who tend to act quickly).Average daily trading volume greater than 100k amp market capitalisation above £25 million - This eliminates small, thinly traded stocks to which investors are unlikely to pay much attention (Jegadeesh's work used a share price above $5).Trailing 12 months sales greater than £25 million – This helps ensure that the surprise isn’t large simply because it’s coming from a low base. earnings and because sales growth is seen as more sustainable than cost reduction. This provides an added measure of reliability as it’s usually more difficult/unusual for companies to tinker with sales vs. A positive sales surprise up 5% and above industry average.A positive earnings surprise up 5% and above industry average.Utilities are excluded since their revenue growths are typically more predictable than those for industrial firms ( financial firms are also excluded).The following illustrative Earnings Surprise Screen combines a number of the criteria used by researchers in this area – these elements could be combined to varying degrees. The phenomena, known as quot Post Earnings Announcement Driftquot finds that these stocks tend to outperform the market for the next 6-12 months.This is generally attributed to the fact that analysts are slow to revise their forecasts and the market does not fully react to the information about future growth conveyed by the earnings surprises. Positive surprises often happen at the beginning of a turnaround, or a new growth cycle where sales start to accelerate beyond the historical rates, “surprising” the analyst community. As far back as 1968, academic studies have found a strong positive correlation between earnings surprises and stock returns, particularly if the stock reacted positively the day after earnings were announced. If a company releases a number higher or lower than the consensus (a combination of all the released estimates), this is known respectively as a positive or negative surprise. It often indicates a user profile.Īnalysts produce individual forecasts based on the company's prospects and trends in growth and costs before a company releases its actual earnings. Account icon An icon in the shape of a person's head and shoulders.
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