Wall Street analysts are some of the best in the world. They are constantly reviewing data and company announcements and making revisions to their estimates.
The good news for us as investors is, we can access these estimates from the people who know far more about a company than we do. We can use their knowledge and skill to help us find the best investment opportunities.
Market participants rely heavily on earnings estimates to gauge a company’s performance. Future earnings estimates are arguably the most important input when attempting to value a firm. Analysts use forecasting models, management guidance and fundamental information on the company to derive an expected Earnings Per Share. This figure can then be used to approximate fair value for a company which in turn will give a target share price.
Investors quickly learn the market is forward looking, so when an analyst announces an upgrade to their earnings forecast, the market often reacts to it by bidding up the stock.
Services such as Thomson Reuters I/B/E/S and S&P Capital IQ provide consensus earnings estimates by tracking the estimates of thousands of investment analysts. Tracking these expectations and their changes can be a very rewarding strategy for stock investors.
Changes in estimates reflect changes in expectations of future performance. Perhaps the economic outlook is better than previously expected, or maybe a new product is selling better than anticipated.
When earnings estimates are revised significantly, upward of 5% or more, stocks tend to show above-average performance. Stock prices of firms with downward revisions tend to show below-average performance after the announcement.
The Top 30 portfolio uses these earnings upgrades to find the 30 most upgraded stocks each month. Here is how we do it:
We get the upgrade information from as many analysts as possible and each month we run a scan against this database using the following rules:
- There must be more than four analysts providing estimates
- The latest EPS estimate for both the current year and next year must be greater than it was one month ago
- There has been at least one upward revision in the earnings estimate for this year and for next year in the last month
- There have been no downward revisions in earnings estimates in the last month
- The Top 30 companies are those that have had the 30 largest percentage increases in current year EPS estimates over the last month.