How to read between the lines of analyst research

Earnings forecasts (and the analysts who make them) tend to come in for a bit of stick from seasoned investors. But while their accuracy is sometimes criticised, those forecasts underpin two of the most important measures of so-called ‘earnings momentum’ in companies – forecast upgrades and earnings surprises. Strategies that focus on these events have been doing very well over the past year.
Analysts are supposed to have a deep understanding of the quoted companies they cover. Detailed research and regular access to management means they can work up valuation models and make predictions about future sales and profitability.
But these forecasts are notoriously difficult to make. Equity strategist James Montier once observed: “…analysts are terribly good at telling us what has just happened but of little use in telling us what is going to happen in the future.”
Despite the criticism, many think analyst forecasts are important because the consensus – or average – opinion of analysts is one of the only ways of predicting company performance. In other words, it’s the best (or perhaps least-worst) way for individual investors to gauge how a stock is likely to perform.
Earnings forecasts play with the minds of investors
Academic assessments over the past 30…