The reporting season for Asian companies is rapidly approaching and our research StarMine team has been scrutinizing earnings forecasts, using StarMine SmartEstimates and Predicted Surprise models in their quest to identify companies likely to beat consensus earnings forecasts. Many Asian companies close their books for the fiscal year on March 31 and report results between April and July. So we checked our track record for the previous fiscal year and were pleased to see we were correct with 90% of our predictions.
The 90% score is in line with our historical average. The one that we missed came in exactly at the consensus (not above or below) and we do not give ourselves credit for that.
Analyzing Predicted Surprise
The Predicted Surprise is calculated on both the StarMine SmartEstimate and the I/B/E/S consensus estimate; it is a measure of the percentage difference between the two. Our research shows that when the Predicted Surprise is plus or minus 2% or more, this indicates that an earnings revision is highly likely.
Historically, the direction of those subsequent earnings revisions or surprises – linked to whether the Predicted Surprise is a positive or negative number – can be predicted accurately about 70% of the time. History also shows that being able to correctly predict the direction of future earnings revisions and earnings surprises gives investors a good chance of predicting which way a company’s stock price will move.
As logic would suggest, a better-than-expected earnings report boosts the company’s share price and vice versa. Indeed, that logic has become so self-evident that it doesn’t pay for an investor to wait to see what the earnings actually are; they have to anticipate what kind of earnings surprise might manifest itself, and position themselves accordingly before the company reports its results.
The table below shows the performance of the companies that were picked to beat and miss estimates last year. As you can see, investors who paid attention to these results would have been able to steer clear of the five companies we expected to report disappointing results – and all five did indeed deliver profits that fell well short of analysts’ forecasts.
POSITIVE SURPRISES
Source: StarMine
NEGATIVE SURPRISES
The next group of surprises
Source: StarMine
As the fiscal year-end approaches for many Asian companies, we will be identifying another ten companies that the StarMine research team believes are most likely to miss or exceed analysts’ estimates – and therefore, those stocks which investors may well find it particularly helpful to follow. In the course of the next few weeks, we’ll be discussing each of those selections in depth – stay tuned!
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