Estimate Trends Point To Winners

11/28/2016


Polls can be wildly inaccurate, whether it comes to predicting the next U.S. president or predicting the operating results of S&P 1500 companies. But they are useful in identifying swings in momentum that could foreshadow surprising outcomes. With our Quadrix Earnings Estimates score, we try to do just that — pinpoint shifts in analyst sentiment about corporate earnings.

EARNINGS ESTIMATES SCORE WORKS WELL, OFTEN
Only the Quadrix Value score (average 12-month outperformance of 1.8%) has come close to the effectiveness of the Earnings Estimates score (1.9% outperformance) at identifying winning stocks in our Quadrix research universe since February 2004. However, the Earnings Estimates score has more frequently outperformed, as shown by its 78% winning percentage, highest among the six Quadrix categories. Data is based on rolling 12-month periods.
Quadrix Category
Average
Outperformance
(%)
Standard
Deviation
(%)
Return/
Risk Ratio
Winning
Percentage
(%)
Momentum
0.5
4.2
0.11
53
Value
1.8
8.3
0.22
52
Quality
(1.2)
4.8
(0.25)
39
Financial Strength
(1.0)
6.5
(0.16)
52
Earnings Estimates
1.9
4.6
0.42
78
Performance
(0.6)
10.8
(0.06)
60
Overall
0.6
4.8
0.13
57
Note: Quadrix scores are percentile ranks, with 100 the best.

The Earnings Estimates score looks at such factors as the spread between the highest and lowest analyst estimates, the number of analyst revisions, and the change in consensus estimates. Many of our Quadrix scores focus on quarterly and annual trends. The Earnings Estimates score considers a much shorter time frame, with some of its metrics looking at changes in the past month. This can lead to sharp fluctuations in the score, especially during earnings season.

For example, F5 Networks' ($144; FFIV) Earnings Estimates rank has surged to 92 from 41 at the end of September. The Earnings Estimates score for Apple ($112; AAPL) has been as high as 92 and as low as 2 over the past eight months; it currently stands at 52. By comparison, neither stock's Quality score has fallen below 90 in more than a year.

SECTOR SNAPSHOT FOR RISING PROFIT ESTIMATES
The S&P 1500 energy sector has the greatest percentage of stocks with rising profit estimates for the current quarter and next fiscal year. The sector is expected to resume growing in the coming year, with the average energy stock projected to generate 24% higher earnings per share.
-- Current Quarter --
Current Fiscal Year
-- Next Fiscal Year --
S&P 1500 Index
(Number Of Companies)
% Of Stocks
With Rising
EPS Ests.
In Past
90 Days
Average
Est. EPS
Change
(%)
% Of Stocks
With Rising
EPS Ests.
In Past
90 Days
Average
Est. EPS
Change
(%)
% Of Stocks
With Rising
EPS Ests.
In Past
90 Days
Average
Est. EPS
Change
(%)
Cons. Discretionary (250)
19
4
38
6
32
20
Consumer Staples (69)
17
8
39
6
36
10
Energy (84)
55
1
50
(31)
55
24
Financials (210)
41
4
55
2
46
10
Health Care (163)
26
5
47
8
31
15
Industrials (232)
23
(3)
42
2
31
13
Materials (94)
18
2
29
4
31
17
Real Estate (97)
30
1
36
2
34
5
Technology (231)
41
15
64
9
45
14
Telecom Services (15)
20
(15)
27
(5)
33
8
Utilities (55)
40
7
69
5
49
3
S&P 1500 Index
30
5
47
4
38
14

However, while the Earnings Estimates scores themselves can be volatile, their effectiveness at finding winning stocks is surprisingly consistent. The average stock that scores above 80 for Earnings Estimates has gone on to outperform the average stock in our Quadrix research universe in 78% of the rolling 12-month returns since February 2004. No other Quadrix category score has a comparable winning percentage above 60%.

In the S&P 1500, the Earnings Estimates score has worked in the past few years, as illustrated below. Strategies that combine the Earnings Estimates score with other Quadrix category scores can identify stocks that outperform. Stocks scoring well for both Earnings Estimates and Value have historically topped the typical stock, though these returns tend to be volatile. More recently, the combinations of Earnings Estimates and Financial Strength, and Earnings Estimates and Performance, have been particularly effective.

Why does the Earnings Estimates score frequently work? Perhaps because investors like to bid up shares of companies with improving prospects.

There's a shortage of such stocks right now. Just 30% of S&P 1500 stocks have seen their profit estimates for the current quarter rise over the past 90 days. Below we review three stocks enjoying favorable analyst revisions.

FedEx ($188; FDX) shares are up 15% since Sept. 20, when the shipping company reported a strong August quarter and gave a bullish forecast for the remainder of fiscal 2017 ending May. Analyst estimates for fiscal 2016 and fiscal 2017 have steadily climbed over the past 90 days, with the consensus projecting double-digit growth for both years. Encouragingly, FedEx has shown itself capable of managing expectations, having topped consensus profit and sales estimates in each of the past four quarters.

Demand for e-commerce continues to grow, with FedEx shipping online purchases that range from mattresses to mobile phones to trampolines. Management has committed $5.6 billion for capital expenditures this year, up 17% from fiscal 2016. FedEx plans to improve the efficiency of its air fleet and expand its ground network. The company has raised its quarterly dividend at least 25% in each of the past three years. FedEx, yielding 0.9%, is a Focus List Buy and a Long-Term Buy.


Lam Research ($107; LRCX) has consistently outgrown the overall semiconductor-equipment market due to its high exposure to 3D NAND flash memory. Demand for wafer-fabrication equipment is notoriously volatile, though Lam expects spending to rise in both 2016 and 2017. This month, Lam projected 2017/2018 revenue of $7.25 billion to $8.00 billion, well above the $7.02 billion consensus for the fiscal year ending June 2018, and per-share earnings of $8.00 to $9.00, versus the $7.91 consensus for fiscal 2018. This guidance improved on targets provided in October, which topped the consensus at the time.

Lam hiked its quarterly dividend 50% to $0.45 per share, payable Jan.4. The company also approved $1 billion in share repurchases, expected over the next 12 to 18 months — enough to reduce the share count 5% to 6%. Lam Research, yielding 1.7%, is a Focus List Buy and a Long-Term Buy.


Zions Bancorp ($39; ZION) is a regional bank, and few pockets of the stock market are hotter right now. S&P 1500 regional banks have averaged total returns of 23% over the past three months, seventh-highest among the 102 industries in the index with at least five stocks. Zions has generated a total return of 32% over that stretch. That rally has pushed the stock's trailing P/E to 21, above its five-year median of 19 and industry median, also 19. Zions looks more attractive when considering its projected 19% profit growth for 2017, compared to the industry median of 8%. Shares trade at 17 times estimated 2017 earnings, roughly in line with industry norms.

Zions' reasonable valuation and high Quadrix scores signal the stock may have more room to run. Its Overall rank of 97 reflects scores above 80 for four Quadrix categories: Momentum, Financial Strength, Earnings Estimates, and Performance. Stocks with high scores for both Earnings Estimates and Financial Strength have performed unusually well recently. The same can be said of the Quadrix combo of Earnings Estimates and Performance. Zions, which yields 0.8%, is a Focus List Buy and a Long-Term Buy.

TOP STOCKS WITH RISING ESTIMATES
We screened for stocks earning above-average Quadrix scores for Value, Financial Strength, Earnings Estimates, and Performance. Their consensus profit estimates have also risen in the past 90 days.
-- Current Quarter --
Current Fiscal Year
--- Next Fiscal Year ---
---------------- Quadrix Scores ----------------
Company (Price; Ticker)
Curr.
Est.
EPS
($)
Est.
EPS,
90 Days
Ago
($)
Est.
EPS
Chg.
(%)
Curr.
Est.
EPS
($)
Est.
EPS,
90 Days
Ago
($)
Est.
EPS
Chg.
(%)
Curr.
Est.
EPS
($)
Est.
EPS,
90 Days
Ago
($)
Est.
EPS
Chg.
(%)
Value
Fin'l
Str.
Earns.
Ests.
Perfor-
mance
Overall
Applied Materials
($32; AMAT)
0.66
0.58
153
2.38
2.22
36
2.50
2.32
5
55
68
77
84
92
Biogen ($318; BIIB)
5.02
5.08
11
20.23
19.97
19
20.75
20.73
3
75
86
57
56
90
F5 Networks
($144; FFIV)
1.94
1.86
12
8.25
7.93
13
9.08
8.84
10
57
91
90
89
95
FedEx ($188; FDX)
2.90
2.96
13
12.15
11.90
12
13.54
13.46
11
67
57
64
66
86
Foot Locker
($73; FL)
1.32
1.33
14
4.78
4.76
11
5.26
5.24
10
77
77
79
67
96
J.P. Morgan Chase
($79; JPM)
1.41
1.36
7
5.89
5.63
(2)
6.26
6.20
6
75
88
79
76
85
Lam Research
($107; LRCX)
2.20
1.80
40
7.79
6.97
22
7.94
7.48
2
72
65
95
81
97
Lear ($129; LEA)
3.45
3.29
8
13.69
13.28
26
14.61
14.07
7
97
51
93
51
99
VMware
($80; VMW)
1.40
1.37
11
4.36
4.29
7
4.69
4.56
7
66
92
93
84
98
Zions Bancorp
($39; ZION)
0.52
0.51
21
1.94
1.88
20
2.31
2.23
19
63
94
82
90
94
Note: Quadrix scores are percentile ranks, with 100 the best.Ā  Estimates for Lam Research haven't yet caught up with the newest guidance.

 


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