Using Earnings Guidance to Enhance Returns
15-Apr-02 12:43 ET
[BRIEFING.COM - Robert Walberg] Earnings season can wreak havoc on a portfolio - especially if you are unfortunate enough to own shares in a company that misses its target and/or guides future earnings estimates lower. While there's no way to completely insulate your portfolio from potential earnings shocks (that's why they're called surprises after all), one good way to reduce your earnings risk and enhance your portfolio's return is to go with the guidance winners. What do we mean by that statement? Simple. History shows that those companies that preannounce positive results, tend to outperform the rest of the market over the next 3- to 6-months.
Using Briefing.com's guidance database on the aptly named Guidance page, we went back and looked at all the companies that upped their sales/earnings estimates roughly six months ago. Over a three day period (10/8/01-10/10/01) there were 19 firms that raised their numbers. Eliminating the stocks trading below $5 per share (risks are too high), the number came down to 14. They were: NMTC, JCI, ET, SSTI, WIN, DL, PEET, WLT, SOV, DMN, PDX, MENT, MCHP, and AMZ.
Three months after these companies issued positive guidance, 12 of the 14 stocks, or 86%, were posting gains. As a whole, the group was up 40%. Admittedly, early October 2001 to early January 2002 was a good period for the market, but these results were still outstanding. By comparison, the DJIA was up 9% and the Nasdaq gained 26%.
Looking at the same basket of stocks three months later (4/10/02), or six months after they initially raised guidance, we found that 93% of them, or 13 of 14, were posting gains. The one stock which was lower 6-months later was a) a tech stock and b) had subsequently issued an earnings warning. As for the rest of the group, 9 of the 13 were above their January levels, while the others had come off their earlier highs but were still above their October levels. Overall the group was up 47%, which compared favorably gains of 12% and 9% recorded by the DJIA and the Nasdaq indices.
We also took a look at those stocks that raised their guidance over the three day period of 1/8/02 to 1/10/02. The first fact to jump out at us was the increased number of companies that had upped their numbers. The number of companies issuing positive guidance jumped to 41 from 19 in just three months. Again removing the stocks trading below $5, the number during this period dipped to 39. The stocks were: ACF, BGP, UCBH, BWA, GP, HTLD, BKS, GM, TGT, GPS, ROST, S, PSUN, MIK, ICN, LTD, WSM, DLX, SAH, BBY, TRPS, JWL, BOBE, COH, LEN, SKX, DPMI, MENT, KNDL, IKOS, HTCH, CHPC, DSTM, OPWV, CHUX, ETR, HLYW, HELE and TIF.
Three months later, 27 of the 39 stocks, or 69%, were posting gains. The total gain for the portfolio was 9.9%. Interestingly, if we removed the eight tech stocks from within this group, the percentage of winners jumped to 81% (25 of 31), and the return rose to 13.4%. Though the rate of return wasn't as spectacular as the first group, 1/10/02 to 4/10/02 was also a difficult period for the overall market, as evidenced by the fact that the Nasdaq fell 13.7% and the DJIA rose by a modest 3.1%.
Although past performance is never a guarantee of future success, the data suggest that by focusing on those companies announcing positive sales/earnings surprises investors can reduce their earnings risk and increase their chances of outperforming the market. Looking back at our guidance page once more we note that the following companies raised their numbers over the past three days (excluding today): CBZ, HEI, SPOT, AOS, CYT, UCBH, ELNT, SHLM, ROST, WTSLA, PNK, EWBC, ANN, NET, PIR, ETR, EMKR, XTND, SHW, ABG, CTB, S, HVT and RGCI. Only XTND trades below $5.
Robert Walberg |
