In this post we present results of a research paper which shows that using Earnings Sentiment is a better predictor of monthly returns than Sell-side Analysts' Revisions.
Country/Region: North America, USA
Asset Class: Equities
Investment Universe: Russell 1000
Research & Application Context:
Alt. Data Factor: Media earnings sentiment
Method of Data Integration: Standalone
Period of Analysis: 01/01/2002-01/07/2018
Investment Direction: Long
Avg. Holding Period: month(s)
Avg. Portfolio Size: 200 stocks
Underlying investment logic
Instead of relying only on Wall Street's Sell-side Earnings Revisions, use Earnings Sentiment indices sourced by a Sentiment data provider from published news articles which give a larger and more frequently updated panel of earnings estimates.
Compare the efficacy of these two different estimates by building two monthly rebalanced portfolios composed of the top quintile (20%) of Russell 1000 stocks ranked by trailing 3-month Sell Side Revisions and trailing 3-month Earnings Sentiment and measure the returns.
The research shows that for large cap US stocks in the period 2002-2018:
Earnings Sentiment measured over the last 3-months was more informative of the next month's market-adjusted return than trailing 3-month Sell-side Analysts' Earnings Revisions
Each month selecting the stocks in the highest Earnings Sentiment quintile outperformed the market by 1 percentage point/year versus 0 percentage points outperformance for stocks in the highest rank by Sell-side Earnings Revisions
There is only mild correlation between stocks in the highest monthly quintiles of Earnings Sentiment and Sell-side Analysts' Revisions
A long strategy based on selecting the top 20% of stocks by Earning Sentiment resulted in Yearly Return of 6.6% and Return per Holding Period of 0.54%
A long-short strategy based on selecting the top/bottom 20% of stocks by Earnings Sentiment resulted in Yearly Return of 1.5%
Remarks & Conclusion
In 2002-2018 Earnings Sentiment was a better predictor of monthly stock performance than Sell-side Earnings Revisions for large cap stocks.
Source: Empirical Research Partners, "Stock Selection: Research and Results", August 2018