Earnings reporting season for Asian companies is rapidly approaching and the StarMine research team has been scrutinizing earnings forecasts, using StarMine SmartEstimates and Predicted Surprises models to identify companies likely to beat consensus earnings. With many Asian companies set to close their books on their fiscal years at the end of March, and to report their results between April and July, we decided to look back at our success in using these StarMine models to identify companies that last fiscal year we expected to report positive or negative earnings surprises. We were correct in 90% of the cases, in line with our historical average.
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 predict correctly the direction of future earnings revisions and earnings surprises gives investors a good chance of forecasting the direction of a company’s stock price.
As logic would suggest, a better-than-expected earnings report usually boosts the company’s share price, and vice versa. 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.
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 results that fell short of expectations – all five did indeed deliver profits that fell well short of analysts’ forecasts.
Targeting another ten companies
As the fiscal year-end approaches for many Asian companies, we will be identifying another ten that StarMine research team believes are most likely to fall short of 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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