The system selects the 20 stocks in the S&P 500 index with the strongest revisions in sales and earnings numbers. Stock selection is also based on earnings revisions. On the other hand, when earnings estimates are declining, meaning that the 5-day moving average is below the 20-day moving average, then the system is completely allocated to cash. More specifically: When the 5-day moving average of earnings estimates is above the 20-day moving average, meaning that earnings estimates are on the rise, the system is fully invested in a portfolio of 20 stocks. The system basically buys and sells a portfolio of stocks based on earnings estimates for companies in the S&P 500. The following quantitative system uses earnings estimates data to enter and exit the market. A Quantitative Approach To Earnings Revisions Based on data from AAII, the portfolio of stocks with rising earnings estimates has delivered an annual return of 23.6% versus an average return of 5.3% for the S&P 500 index in the same period. The analysts at AAII have tracked a portfolio of companies with rising earnings expectations since 2003, and such portfolio has produced impressive gains. stock market can lead to market-beating returns. Reaching a similar conclusion, data from the American Association of Individual Investors (AAII) shows that investing in stocks with strong and positive earnings revisions in the U.S. Our results indicate that an investor who purchased the market indexes of the five countries with the highest revision ratios would have outperformed the mean return of all 24 countries included in the study by up to 6 percentage points over a 12-month holding period." "Using the earnings-estimate revision ratio, an aggregate measure of changes in analysts' earnings forecasts, an investor can enhance returns from international asset allocation. Pearson evaluates how investors can obtain market-beating returns by investing in the markets with the biggest improvements in earnings revisions. This is an almost obvious concept, but it's easy to miss the forest for the trees when looking at all kinds of sophisticated and even esoteric indicators.Ī research paper entitled Using Earnings Estimates for Global Asset Allocation, by Joseph F. As such, the value of the stock ultimately depends on the earnings that the business generates over time. In essence, a stock is simply a share in an ownership of a business.
#Earnings estimate revisions driver
Economic models, chart analysis, and all kinds of quantitative algorithms are some of the alternatives available to investors.Īt the end of the day, however, focusing on simple factors with big predictive power can be a more effective approach, and earnings are one of the most important variables to consider, if not the single most important return driver for stocks.
#Earnings estimate revisions how to
Rivers of ink have been written about the best strategies for market timing and how to implement them.
However, simplicity is the ultimate sophistication, and focusing on earnings revisions as a key return driver for both the market as a whole and individual stocks in particular can generate attractive risk-adjusted returns over time. The stock market is a complex mechanism, and there is an almost infinite amount of variables to consider when making investment decisions.
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