Earnings Estimates Revision Screen: Why investors should keep an eye on consensus Sales and EPS forecasts

In BriefA momentum screen based on buying stocks with rising analyst earnings estimate revisions in light of empirical findings that stocks with their estimates revised often outperform the market over at least the next 12 months.BackgroundEarnings estimates are created by equity analysts in order to project the growth and profitability of a company on a quarterly and/or yearly basis. In 1969, Burton Fabricand was apparently the first to write about the strong link between estimate revisions and subsequent stock prices, showing that portfolios of stocks selected on the basis of large estimate revisions significantly beat the market over a three month holding period. Following this, in 1979 Leonard Zacks (founder of Zacks Investment Research) published an article entitled “EPS Forecasts – Accuracy is not enough.”  He found that “there was no correlation between forecast EPS growth and stock growth… consistent with efficient market concepts”. In contrast, “portfolios of companies whose consensus forecasts underestimated actual actual earnings growth outperformed the market on average”. He concluded that, to achieve excess returns, stock selection must be based on anticipating changes in the consensus expectation, rather than changes in actual earnings. More recently, researchers McKnight and Todd examined a…