What we are looking for
A company that could be ready to surprise the market (in a good way) with its upcoming earnings report.
We are right in the middle of the third-quarter earnings season. As companies announce their earnings, media and data services will report on whether or not they beat the “consensus” – the supposed collective view of the market, or “Street.” Whether or not they do will generally dictate which direction the share price trades in the days immediately after the announcement.
The LSEG StarMine SmartEstimate can be a tool to help consistently pick the winners, or those who are going to surprise on the upside. The SmartEstimate improves on the consensus estimate, which is a simple average of all analyst estimates. When looking at historical performance it turns out that not all analysts, and not all estimates, are equal.
Unsurprisingly, analysts who have historically been more accurate predicting earnings for a particular name, or within a particular sector, continue to make more accurate estimates on those names and within that sector. Also unsurprisingly, more recent estimates are more accurate, as they benefit from any new information that might affect the companies’ profitability.
The SmartEstimate takes advantage of these facts by putting more weight on estimates from the more accurate analysts, and on more recent estimates. It also identifies “clusters,” when a number of analysts revise their estimates in the same direction at the same time. The back-testing of historical performance validates what one would intuitively think – that these clusters indicate that something significant has happened and that estimates made before this date are best ignored.
When the SmartEstimate is 20 per cent higher (or lower) than the consensus estimate, earnings are better (or worse) than the consensus estimate about three-quarters of the time.
More about London Stock Exchange Group
LSEG is one of the world’s leading providers of financial markets infrastructure. It delivers financial data, analytics, news and index products to more than 40,000 customers in 190 countries. Since 1698, we have been helping customers seize opportunities and create value.
The Screen
- We will screen the universe of Canadian- and U.S.-listed companies that have a SmartEstimate for earnings per share (EPS) which is at least double the consensus estimate.
- In the table, included are: the consensus EPS, SmartEstimate EPS and the difference between the two, which is called the predicted surprise.
- For reference, also included are the number of analysts covering the stock for this quarter, and the date of the next earnings announcement.
What we found
All eight companies with a predicted surprise of 100 per cent or more are listed in the United States, but two are headquartered in China and one in Canada.
Entertainment platform iQIYI is a very interesting case. The consensus estimate is based on five analyst estimates. Two were made in late August, and both were significantly lower than the previous estimate (a.k.a. a downward revision). The other three were made just in the last week and were a very sharp upward revision of previous estimates.
Additionally, there are six analyst estimates that are excluded from the consensus estimate calculation because their estimates are not based on U.S. GAAP accounting. iQIYI is a Chinese company, incorporated in the Cayman Islands, that is listed in New York, so it’s not surprising that there are some complex accounting intricacies. Still, these analyst estimates are potentially very informative – three were made before September, but the other three were also revised in just the last week. All three of these were also sharp upward revisions (at least three tines higher), and one of these analysts is the most accurate of the entire cohort at predicting IQIYI’s earnings historically.
It appears that analysts armed with the most recent information have a much more bullish view on what the company will report for third-quarter earnings. If the majority of investors are using the consensus estimate to value the stock this means it could be (potentially very) undervalued. And if earnings are significantly higher than the consensus when the company announces on Nov. 21, the stock could be set for an immediate pop.
Hugh Smith, CFA, MBA, is director, analytics at London Stock Exchange Group.