Evidence of Estimates, Revisions Moving the Market - Voice of the People


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Zacks highlights commentary from People and Picks Member «JohntheWizard».

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The evidence for estimates and revisions thereof moving the stock market

Just surf for the words " anomaly and excess returns ".

I keep reading that there is plenty of evidence that forecasted analysts' expectations over the coming year have long been proven to be a significant anomaly ( =abnormality ) of giving excess returns; and that there are others concerning EPS forecast, Dividend forecast, and surprise forecast. Zacks emphasizes it is more the revisions of those forecasts (=estimate revisions) that move the share prices.

Most of the evidence dates from before 2000. Despite black Monday in 1987, practically every trading strategy worked in the eighties and nineties. Excessive in this world means some 5% above the benchmark. The benchmark (S&P500) compounded 14%/year during those days, 17%/year including dividends. Excessive returns were thus of the order of 22%/year. Those were the days.

The best 30 of the 85 stocks I selected back in April on the basis of what Mo and JaiH considered as safe stocks compounded 28%/year during those days, truly abnormal and excessive.

During the past four weeks of the MarketWatch fantasy contest , the benchmark rose 4.7%. Abnormally excessive returns should have been of the order of 5%/4wks. The best of the 1250 contestants compounded less than 2%. The best 30 of our 85 stocks did 2.7%/4wks.

If you just make a watch list of stocks that, like Apple, kept year-over-year increasing their Net Earnings during the past eight years and take the best 30 of those 122 stocks, these best 30 compounded 9.7%/4wks. Those are truly abnormal returns during those past 4 weeks.

Such a watch list can be easily made putting that query of 8 years of y-o-y increasing Net Earnings in Research Wizard. During the past 32 years, these weekly rebalanced best 30 stocks compounded 29%/year with a maximum drawdown of -32%.

Now here is the true winner of these past four weeks. If you would have taken the best 30 of the Zacks Rank #1 stocks, you would have made 10.4%, truly abnormally abnormal! With these same selection criteria applied during the past 12 years (the maximum time span that RW allows you to take), these 30 best stocks compounded 50%/year with a maximum drawdown of -51%.

Since the onset of the credit crisis, October 12, 2007, these 30 best made 20%/year, however with that risk of -51%. The 30 best Apples compounded 32%/year with much less risk of -27%. The best 30 of these 85 safe stocks selected here at P&P compounded 23%/year with a risk of -18%.

So take your picks that suit you best. But remember, these are just gaming scenarios. Zacks Ranking works only that well for small caps that only allow for relatively small investments with abnormal risks. Practically no person in this world is ready to take hits of -50%.

And there is pretty solid evidence that any form of stop-loss system during holding periods for your individual picks worsens the risks and performance. In addition, one-day slippage often takes -5%/year of the performance and deteriorates the risks. The 12 picks I show this week at P&P are just the 12 best of the Apples of this world.

I am seriously interested in finding the cause of these abnormally excessive returns. The techniques for identifying causality in historical data using computational finance are controversial at best. Can someone help me on this point?                   

The most recent picks by «JohntheWizard» are:
A buy rating on Campbell Soup ( CPB ),
a buy rating on CVS Caremark ( CVS ) and
a buy rating on Micros Systems ( MCRS ).

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CAMPBELL SOUP ( CPB ): Free Stock Analysis Report
CVS CAREMARK CP ( CVS ): Free Stock Analysis Report
MICROS SYS ( MCRS ): Free Stock Analysis Report
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The views and opinions expressed herein are the views and opinions of the author and do not necessarily reflect those of Nasdaq, Inc.

This article appears in: Investing , Investing Ideas , Stocks
Referenced Stocks: CPB , CVS , MCRS

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