What are we looking for?
Notably shorted large- and mid-cap companies trading in the United States that will be reporting earnings over the next 60 days and could experience a positive earnings surprise.
Second-quarter earnings in the U.S. middle- and large-cap space have been, over all, better than expected so far. According to our Thomson Reuters Earnings Season application on Eikon, 67 per cent of middle- and large-cap companies in the United States have beat earnings estimates. Breaking this down by sector, technology (78 per cent beat), consumer non-cyclical (74 per cent beat) and industrials (72 per cent beat) were the top three sectors so far this quarter when it comes to topping estimates.
Our screen looks for middle- and large-cap companies that have yet to announce earnings this quarter and could see a positive upside surprise. We begin by screening for U.S.-listed companies with market capitalizations above $1-billion (U.S.) that have at least five analysts covering that stock and will be announcing quarterly earnings in the next 60 days. Next, we're looking for companies that have a short interest percentage greater than 7 per cent and a broker mean recommendation label of hold – in order to gauge whether the stock has some pessimistic sentiment going into earnings. "Short interest percentage" is the number of shorted shares divided by the number of shares outstanding.
Lastly, we're looking for positive upcoming earnings surprises for the current quarter by comparing the mean analyst estimate for earnings per share with a Thomson Reuters proprietary Smart Estimate for EPS, which is essentially a weighted-average EPS estimate dependent on analyst accuracy and estimate age. The difference between the mean estimate and the Smart Estimate is known as the "predicted surprise." We're filtering for companies with a predicted surprise greater than 2 per cent.
More about Thomson Reuters
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What did we find?
Using Thomson Reuters Eikon, our screen identified nine companies that meet the screen criteria. Sorting the list by short interest percentage, AK Steel Holding Corp. tops the list with a short interest position of 21 per cent. Digging deeper into the short interest figure, the number of short positions have been accumulating as this number increased from 14.3 per cent in June, 2016. If earnings surprise to the upside, this stock can be set up for a short squeeze, which essentially is price-driven demand as a result of short-sellers buying the stock to cover their short positions. Interestingly, there is some "dispersion" between analysts on this stock, which could signal price volatility in the event of any earnings surprises. Out of the 15 analysts covering the stock, four analysts have issued a buy rating, seven analysts have it as a hold and four analysts have issued a sell or strong sell rating.
This commentary does not provide individualized advice or recommendations for any specific subscriber or portfolio. Investors should conduct further research before investing.
Patrick Gattuso, CFA, works in the financial and risk unit of Thomson Reuters and specializes in asset management.