Earnings Revision Strategy

Investment Summary
The Earnings Revision Strategy is based on the market anomaly that Investors are very slow in reacting to current losses or profits because of behavioral bias effects. It is very profitable to capture gains following upward earnings revisions or downward earnings revisions. A long short portfolio ca be created by buying stocks with the highest upward revisions and selling short stocks with downward revisions.

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Investment Performance (Good Investment Selection Guide)
Investment Return (?): 19% Volatility (?): 7.9% Sharpe Ratio: 2.4 Maximum Drawdown: -15.4%

Investment’s Fundamental Concept:
Investors are very slow in reacting to current losses or profits because of behavioral bias effects. It is very profitable to capture gains following upward earnings revisions and downard earnings revisions since the price move after the earnings revision is very slow to react and the move is small relative to the full price move.

Investment’s Logic:

Investors are very slow in reacting to current losses or profits because of behavioral bias effects. It is very profitable to capture gains following upward earnings revisions or downward earnings revisions. A long short portfolio ca be created by buying stocks with the highest upward revisions and selling short stocks with downward revisions.

Investment Universe conssits of US stocks with a minimum coverage of three analysts. The first step is to gather earnings forecasts for the next fiscal year for each stock on the first trading each month.

A coefficeint of variation of all earnings estimates is calculated by estimating the standard deviation of all estimates making up the consensus as a percentage of the absolute value of the mean value of all estimates for the stock.

Revision ratios are computed as the average monthly change in the expected earnings per share, as a percentage of the absulute value of the latest consensus forecasts.

Stocks are ranked in descending order into 5 equally weighted portfolios on basis of their earnings revision ratios. 3 subportfolios are formed based on the dispersion in the consensus forecasts within each earnings revision portfolio.

The investor goes long stocks with highest upward earnings revisions and lowest dispersion and goes short on stokcs with the greatest downward earnings revisions and lowest dispersion.

The portfolio is equally weighted and rebalanced monthly.

Other Investment Strategy Characteristics:
Investment Type: Value Investing Investment Risk: 1/5 Very Low Backtest Range: 30-40 years Rebalancing period: Daily
Investment Strategy Markets:
  • US Stocks