Should investors look for consistent predictability, or upside surprises, in quarterly earnings announcements? In his November 2009 paper entitled “Meeting Analyst Forecasts and Stock Returns”, Ioan Mirciov investigates relationships between announced earnings (relative to analyst forecasts) and long-run future stock performance. Using earnings forecasts, actual earnings, stock returns and firm characteristics data for a broad sample of U.S. stocks over the period 1993-2007, he concludes that:
- Stocks of firms with quarterly earning announcements closely matching most recent analyst consensus forecasts tend to outperform stocks of earnings overachievers and underachievers over the long run (next five years). However, stocks of earnings overachievers tend to outperform slightly over the next six months.
- Firms closely matching analyst consensus forecasts tend to be large and followed by many analysts, whose forecasts have a relatively small dispersion.
- The proportion of past quarters meeting (beating) forecasts relates positively (negatively) to future returns.
- Further, stocks of firms with a long sequence of closely meeting (beating) expectations tend to outperform (underperform) the following year.
- Results persist after controlling for size, book-to-market, analyst coverage, analyst forecast dispersion and momentum. Momentum tends to be higher for stocks of firms meeting or beating earnings forecasts.
- Most findings are much more significant in the first half of the sample (1993-2000) than in the second half (2000-2007).
- Results suggest that some firms manage current earnings to avoid future negative surprises.
In summary, investors looking for long-term stock holdings may want to focus on firms that consistently meet (not beat) consensus earnings forecasts. However, momentum traders may want to lean slightly toward earnings overachievers.
