This article is a response to a student of the course who asked whether earning revisions can be a good trading or investing opportunity:

Ben and Leonard Zacks, the founders of Zacks Investment Research once said the following: “Earnings estimate revisions are the most powerful force impacting stock prices”. I don’t fully agree with the magnitude of the statement, but I do agree that earnings estimates revision trends are a powerful force.

Trends in Earnings Estimates changes move stock prices

How can you include this conclusion in the value investing method? Can you have such earnings revisions in mind as a catalyst for the stocks that you’re already in, or can you look for this kind of revisions as a supportive argument to enter into the market?

Or maybe you can include estimate revisions in your analytical process and compare those numbers with your forecast?

Slight headwinds ahead

In practice I’ve used Earnings revisions data (especially ER trends) only as a slight head wind (hindrance) or slight tail wind (help) for an investment that I’ve already decided to make.

Key word: “Slight“

This is the theory: Once IBs start changing their minds, some are fast and some are slow to revise their numbers and recommendations, so they create a sentiment and stock price trend for a while, as they gradually all converge on the same page over 1-3 months time.

In addition those initial analyst estimate revisions are just the beginning of a negative fundamental trend for the company as well. Hence, as an analyst you should question if you really know better than twenty professional industry and company professionals.

Because it could be a year long (or worst case: several years long) negative trend in fundamentals beginning. After about a year, expectations and stock prices have *often* (but not always) taken the new reality into account.

You May Also Want to Read These Articles:

• How to Time Your Investment
• What is The New Year’s Effect?
• Technical Analysis 101