The StarMine research team at Refinitiv scrutinizes earnings forecasts, in search of companies that are likely to beat consensus earnings, using StarMine SmartEstimates® and Predicted Surprises. Highlighting 10 companies that we believed had a high probability of recording an earnings surprise, we used these measures to accurately predict the direction of the subsequent earnings surprise in 80% of the cases in the latest quarterly reporting period for North American companies.
The Predicted Surprise percent relies on both StarMine SmartEstimate® and the I/B/E/S consensus estimate, and is a measure of the percentage difference between the two. Our research shows that when the magnitude of the Predicted Surprise is significant, it is a good predictor of the direction of future earnings revisions, historically getting subsequent surprises directionally correct 70% of the time. History also shows that correctly predicting the direction of future earnings revisions and earnings surprises gives investors a good chance of predicting the direction of changes in the stock price, as the market reacts to the flow of earnings news. Indeed, that correlation between stock price movements and earnings news has become so well understood that it’s no longer profitable for investors to wait until after the surprise is reported. Instead, one has to anticipate them.
The StarMineSmartEstimate®, upon which this earning surprise forecast relies, is designed to be a more accurate version of consensus. It’s a weighted reformulation of analyst estimates, designed to place more emphasis on the most recent forecasts from the analysts with the best track records.
The chart below shows the results of our team’s study of ten companies that had a high probability of reporting an earnings surprise.
Our analyst went on Fox Business News shortly before Alcoa Inc. (AA) announced its results for the quarter and predicted that the metals company would post earnings that would fall short of analysts’ estimates – a view based on the results generated by this analysis. When Alcoa announced its quarterly earnings, it did miss expectations. (Although the stock fell in the immediate aftermath of the earnings report, it has since recovered some of those losses and remains largely flat compared to pre-earnings release levels.) The consensus at the time of reporting was that Alcoa would report earnings of 23 cents a share. In contrast, the SmartEstimate stood at 21 cents a share; Alcoa actually reported earnings of only 15 cents a share. You can view the original article on AlphaNow website here.
We also believed that Generac Holdings Inc. (GNRC), with a positive Predicted Surprise of 10.7%, would beat analysts’ earnings estimates. Sure enough, the company posted results of 75 cents a share, dwarfing the consensus estimate of 56 cents a share. In the month that has followed this big earnings surprise, Generac’s stock price has also soared, hitting $26 a share from $20 about a month ago.
To be sure, the Predicted Surprise failed to accurately project the direction of the earnings surprise that Morgan Stanley delivered. However, the financial institution’s earnings were significantly affected by its incorporation of a debt valuation adjustment (DVA) of $3.4 billion. That resulted in much higher earnings than any analyst had anticipated; nonetheless, as investors reacted to news about Morgan Stanley’s operations rather than to the DVA adjustments, the stock took a hit.
Keep an eye open for the results of our survey for the fourth quarter, when we’ll tell you which stocks we believe are poised to deliver earnings surprises going forward.
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