Profit ‘Predictor’ Lives Up to Billing in Test
A stock-scoring technique named SUE is supposed to help spot companies that are likely to beat Wall Street’s quarterly earnings estimates, and those that are likely to fall short.
But does it work--and does it help foretell the near-term trend in the stocks’ prices as well?
A Times study of fourth-quarter earnings of some high- and low-scoring stocks according to SUE--”standardized unexpected earnings”--shows that the scores did indeed predict the earnings trends.
And as a group, the stocks of the companies with high SUE scores have done better than those with low scores.
Though our sampling of 20 stocks was small, 80% of the firms “surprised” as SUE predicted.
What is a SUE score? This arcane but nifty statistic measures the per-share earnings by which a company beats--or falls short of--analysts’ estimates in a given period, divided by the “standard deviation” of the estimates.
Standard deviation is a numerical expression of how much certain data--in this case, earnings estimates--deviate from the mean.
Significant SUE scores tend to go to companies that beat estimates that are clustered in a narrow range. In other words, a company with a high SUE score has been pleasantly surprising the majority of analysts lately, while low scorers have been unpleasantly surprising.
Once a trend begins--in either direction--it tends to last a while.
Joseph J. Abbott, equity strategist at earnings tracker IBES Inc. in New York, has been a proponent of SUE scores. On Jan. 20, The Times published a list of 11 stocks whose SUE scores, according to Abbott, suggested they would beat fourth-quarter earnings estimates. Nine other stocks were listed for their potential to fall short of fourth-quarter estimates, according to Abbott.
His criteria: Positive surprise candidates must have had SUE scores of +1.0 or higher in the two previous quarters, and the analysts’ consensus profit estimate for the latest quarter must have risen in the previous three months.
Negative surprise candidates must have had SUE scores of -1.0 or lower in the two previous quarters, and the analysts’ consensus profit estimate for the latest quarter must have fallen in the previous three months.
Companies that performed as predicted include America Online, whose two previous SUE scores were +2.4 and +3.7. AOL posted fourth-quarter earnings of 9 cents a share, topping the consensus 7 cents.
Meanwhile, Polaroid--with previous SUEs of -3.1 and -1.0--fell short of earnings estimates, as predicted. It reported a 14-cent-per-share loss rather than the consensus 10-cent profit.
Of course, no stock-scoring system is perfect. Insurer Progressive, one of our “positive surprise” candidates, came up short instead--reporting a fourth-quarter profit of $1.38 a share instead of the consensus $1.53.
Still, of the 20 companies we listed, 16 surprised as expected, three pulled the opposite surprise, and one matched the consensus estimate.
How did the stocks perform? Through Thursday, the stocks of the positive surprise candidates have risen an average of 11.5% since Jan. 20, compared with a 3% gain for the blue-chip Standard & Poor’s 500 index.
The stocks of the negative surprise candidates also have beaten the S&P;, but their average gain was 5.9%--significantly below the positive-surprise group’s average results.
Unfortunately, SUE scores aren’t something that most investors can calculate themselves. However, The Times will periodically list in Market Savvy stocks whose scores suggest they are on track to surprise positively with earnings.
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How They Did
These companies were identified as fourth-quarter earnings surprise candidates in a Jan. 20 Savvy Confidential feature about SUE scores (“standardized unexpected earnings”). Sixteen of 20 “surprised” as predicted. Stocks of the positive surprise candidates have outperformed the broad market, on average. So have the stocks of the negative surprise candidates, but by a smaller amount.
Positive Surprise Candidates
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% change Ticker Estimated Actual Thursday since Company symbol Earnings* Earnings* close Jan. 20 America Online AOL $0.07 $0.09 $150.00 +102.0% Amgen AMGN 0.42 0.45 76.88 +35.2 TJX TJX 0.35 0.39 33.63 +16.2 Gap GPS 0.50 0.53 67.25 +14.0 Applied Materials AMAT 0.06 0.11 64.38 +11.8 McDermott Intl. MDR 0.54 0.66 25.13 +8.3 Adolph Coors RKY 0.22 0.25 53.88 --3.1 Placer Dome PDG 0.08 0.10 11.06 --5.9 Progressive PGR 1.53 1.38 143.88 --9.6 Centex CTX 0.83 0.96 32.50 --21.2 W.R. Grace GRA 0.31 0.33 12.44 --21.3 Average +11.5
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Negative Surprise Candidates
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% change Ticker Estimated Actual Thursday since Company symbol Earnings* Earnings* close Jan. 20 Mirage Resorts MIR $0.22 $0.20 $21.00 +40.0% Williams WMB 0.21 --0.02 39.50 +33.9 Royal Dutch Petroleum RD 0.30 0.27 52.13 +16.3 Helmerich & Payne HP 0.26 0.26 21.81 +14.4 Polaroid PRD 0.10 --0.14 19.94 +7.0 Hercules HPC 0.29 0.33 25.44 --4.2 Tenneco TEN 0.16 0.02 28.94 --16.4 PacifiCorp PPW 0.20 0.22 16.88 --18.4 Timken TKR 0.22 0.21 16.25 --19.3 Average +5.9 S&P; 500 +3.0
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Notes: Standardized unexpected earnings measures the per-share earnings by which a company beats--or falls short of--analysts’ estimates in a given period divided by the standard deviation of the estimates. Fourth-quarter estimates shown are the final forecasts for operating earnings and may have been revised since the Jan. 20 chart.
* Fourth-quarter earnings-per-share
Sources: IBES, Bloomberg News
