Investing in stocks that are experiencing upward earnings revisions can be a powerful strategy for generating market-beating returns. This approach is based on the premise that positive changes in earnings expectations often lead to strong stock performance. Let’s explore why this strategy works and how investors can identify promising candidates.
Why Upward Earnings Revisions Matter
Earnings revisions occur when analysts adjust their forecasts for a company’s future profits. Upward revisions are particularly significant because they suggest that a company’s financial outlook is improving. There are several reasons why stocks with positive earnings revisions tend to outperform:
- Market Inefficiency: The market often underreacts to new information, especially positive news. This creates an opportunity for investors who can identify and act on upward revisions before the broader market fully prices them in.
- Momentum Effect: Positive revisions can create a virtuous cycle, attracting more investor attention and potentially leading to further upward revisions.
- Fundamental Improvement: Upward revisions often reflect genuine improvements in a company’s business prospects, which can drive long-term stock appreciation.
Identifying Stocks with Upward Earnings Revisions
To capitalize on this strategy, investors need reliable methods for identifying stocks with positive earnings momentum. Some key criteria to consider include:
- Consistency of Revisions: Look for stocks with multiple upward revisions over recent months, rather than just a single adjustment.
- Magnitude of Revisions: Larger percentage increases in earnings estimates are generally more significant than smaller ones.
- Analyst Consensus: Stocks with broad agreement among analysts about improving earnings prospects may be stronger candidates.
- Earnings Surprise History: Companies that consistently beat earnings estimates may be more likely to see continued upward revisions.
- Sector Trends: Consider whether the upward revisions are part of a broader industry trend or specific to the company.
Validea’s Wayne Thorp-Inspired Model
One systematic approach to identifying stocks with positive earnings revisions is the model developed by Validea based on the work of Wayne Thorp. This model focuses on several key criteria:
- Analyst Coverage: The stock must have at least four analysts providing coverage to ensure sufficient data points.
- Current Year Estimate Revisions: The current year’s earnings per share (EPS) estimate must be higher than it was one month ago.
- Next Year Estimate Revisions: The EPS estimate for the next fiscal year must also be higher than it was a month ago.
- Revision Frequency: There must be more than one positive estimate revision for the current year in the past 30 days, with no negative revisions.
- Future Revision Consistency: The same criteria of multiple positive revisions and no negative revisions must apply to the next fiscal year’s estimates.
This model aims to identify stocks with strong, consistent upward momentum in earnings expectations, which may be poised for outperformance.
5 Stocks with Recent Upward Earnings Revisions
Based on the Validea models and the provided PDF files, here are five stocks that currently score highly and have experienced recent upward earnings revisions:
Comfort Systems USA provides mechanical and electrical contracting services. It scores 100% on the Wayne Thorp-inspired earnings revision model. FIX has seen 5 upward revisions for both current and next year’s earnings estimates in the past month, with no downward revisions.
Other strong Validea model scores for FIX include:
- Twin Momentum Investor (94%): This model, based on Dashan Huang’s work, indicates FIX has strong fundamental and price momentum.
- P/E Growth Investor (91%): Based on Peter Lynch’s strategy, this high score suggests FIX has an attractive combination of growth and value.
- Momentum Investor (89%): This model looks for stocks with strong price performance and earnings growth.
Garmin is a global provider of navigation and communication devices. It scores 100% on the earnings revision model with 2 upward revisions for both current and next fiscal year’s estimates in the past month.
Other high-scoring Validea models for GRMN include:
- Multi-Factor Investor (93%): Based on Pim van Vliet’s strategy, this suggests GRMN is a low-volatility stock with strong shareholder yield and momentum.
- P/B Growth Investor (88%): Inspired by Partha Mohanram’s strategy, this indicates GRMN has strong growth characteristics relative to its book value.
- Patient Investor (86%): Based on Warren Buffett’s approach, this high score suggests GRMN has durable competitive advantages and strong, consistent financial performance.
HP Inc is a global provider of personal computing and printing products. HPQ scores 100% on the earnings revision model, with 1 upward revision for both current and next fiscal year’s estimates in the past month.
HPQ also scores highly on these Validea models:
- Growth/Value Investor (100%): Based on James O’Shaughnessy’s strategy, this perfect score indicates HPQ has an excellent combination of value and growth characteristics.
- Earnings Yield Investor (100%): Inspired by Joel Greenblatt’s “Magic Formula,” this suggests HPQ has an attractive combination of earnings yield and return on capital.
- Multi-Factor Investor (93%): This high score on van Vliet’s model indicates HPQ is a low-volatility stock with strong shareholder yield and momentum.
Howmet Aerospace provides advanced engineered solutions for aerospace and transportation. While it scores 60% on the earnings revision model, it excels in other areas:
- Twin Momentum Investor (100%): This perfect score suggests HWM has exceptionally strong fundamental and price momentum.
- Quantitative Momentum Investor (100%): Based on Wesley Gray’s work, this indicates HWM has strong and consistent price momentum.
- Multi-Factor Investor (93%): This high score on van Vliet’s model suggests HWM is a low-volatility stock with strong shareholder yield and momentum.
Trane Technologies is a global climate innovator. It scores 80% on the earnings revision model, with 8 upward revisions for the current year’s estimates but one downward revision for next year.
TT also performs well on these Validea models:
- Twin Momentum Investor (100%): This perfect score indicates TT has very strong fundamental and price momentum.
- Quantitative Momentum Investor (100%): This suggests TT has strong and consistent price momentum according to Gray’s criteria.
- Multi-Factor Investor (93%): This high score on van Vliet’s model indicates TT is a low-volatility stock with strong shareholder yield and momentum.
- P/E Growth Investor (87%): Based on Lynch’s strategy, this suggests TT has an attractive combination of growth and value characteristics.
Investing in stocks with upward earnings revisions can be a potent strategy for identifying companies with improving financial prospects. By focusing on consistent, broad-based improvements in earnings expectations, investors can potentially position themselves to benefit from positive momentum before it’s fully reflected in stock prices.
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