Picking Stocks Based On Estimate Revisions

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Of the many things that influence a stock’s price, earnings are a key variable.

But it isn’t enough to just look at the trend of earnings, or the consensus among analysts about earnings expectations for next year. The earnings metric that interests me is forward estimate revisions. When an analyst publishes a revision to her estimate, it’s a big deal. She is now on record, and she must justify her change of mind by putting forth her arguments for all to see.

Even slight changes in expectations of future earnings or the earnings growth rate, can translate into a significant and lasting impact on the price of the stock in question.

While the price of the stock can jump (or fall) immediately, the full impact of a revision can take months to be fully reflected in the price.

Today I’m going to share with you a screen that I’ve been using with clients since 2008. This screen look for the most aggressive upward revisions and downward revisions, based on the average of all analysts who follow and report on these stocks. There must be at least three analysts covering each of the stocks.

Only the 5 stocks with the largest positive (and negative) percentage changes over the last month for this year’s expected earnings per share forecast make it through the final screen.

big estimate revisions jan 17

 

 

 

 

 

 

The first thing you might notice is that there are only 8 stocks in this, my most current list. Normally there are 10, but in a market environment where there are so many unknowns about which companies will thrive under the new administration, analysts have recently become slightly reluctant to stick their collective necks out by making bold predictions.

I’ve sorted the list by the consensus percent change in estimates for the current year. There are 4 upward revisions, and 4 downward. I also show the revisions for the following year

What we end up with is a short list of candidates for further study. These are companies that the analyst community has strong feelings about. The analysts are making bold calls here, and if they turn out to be wrong, they risk damage to their credibility and maybe their reputation.

This is not a recommended buy list, but it can give you some ideas that you may not have been aware of during the course of your usual research process.

About the Author

Former head of equity trading, Northern Trust Bank, Chicago. Teacher, trainer, mentor, market historian, and perpetual student of all things related to the stock market and excellence in investing.

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