Samuel Oubadia is a senior analyst at Lorne Steinberg Wealth Management in Montreal.
What are we looking for?
Research has shown that upgrades in a company’s consensus earnings estimates often lead to a period of outperformance in its share price. Conversely, stocks with negative earnings revisions tend to underperform.
At Lorne Steinberg Wealth Management, we are always on the lookout for stocks that are deeply undervalued. Today, we search for companies that have seen a consensus upgrade in their earnings estimates over the last three months, but which have not had a material move higher in their share price (over a similar period of time).
Larger companies often have a greater number of analysts covering their stock. But, of course, not all analysts see eye-to-eye and earnings revisions can be quite divergent. As such, upward revisions may come hand in hand with downward revisions. Using S&P Capital IQ, we are screening for stocks that have at least 15 analysts generating estimates and where the consensus revision is exceedingly positive. Specifically, we are looking for a ratio of earnings upgrades to downgrades of at least three to one.
To further narrow the list of companies, we are screening on other factors such as forward price-earnings multiple, estimated earnings growth over a one-year period and return on equity. Introducing these other factors provides the added dimensions of valuation and profitability, both of which are important criteria for us when we evaluate stocks and that are often not captured by the earnings revisions.
What we found
The results of the screen can be seen in the accompanying table. The screen produced a broad range of companies across different sectors and countries.
One might reasonably ask to what extent future gains in stock prices are merely the result of the upgrades in and of themselves. While countless studies have tried to answer this question, we point it out to make sure that investors consider such issues when looking at this list of companies. This is just one of the risks when considering investments based on earnings revisions.
As always, investors are strongly advised to do their own research before buying any of the stocks listed here.