Why Fundamentals?

First and foremost, the reason is how institutional investors, who comprise 90% of the activity on the exchanges, determine which stocks they will purchase. Know what institutional investors are watching and/or buying as oppose to guessing what they are. Consider these two key fundamentals that we also use as a foundation in our Tops Stock service. These could immediately boost your portfolio performance.

Below are the results from two studies conducted by a leading investment research firm.

The first study was done to show the performance impact the percentage change in the current year consensus earnings estimates have on stock prices. The study was conducted over a fifteen-year period covering both bull and bear markets. The second study looks at earnings uncertainty. This study, also conducted over a fifteen year period, showed the lower the uncertainty of earnings tend to outperform over time.

First Study

The universe of stocks for the first study were comprised of companies whose market capitalizations were at least $100 million and had at least one analyst following the company. This came to a total of approximately 3,000 stocks.

The Portfolios

There were three portfolios established based upon the percentage change to the current year consensus earnings estimates.

Portfolio A – Stocks for which the consensus earnings estimates fell by over 1% during the past month.

Portfolio B – Stocks for which the consensus earnings estimates did not change during the past month.

Portfolio C – Stocks for which the consensus earnings estimates rose by over 1% during the past month.

The stocks were sorted into the three portfolios and their performance was measured for the next or following month. This process was repeated every month for a full fifteen years. Transaction costs were not factored in.

First Study Results

Portfolio A – had an annualized return over the 15 years of +0.70%.

Portfolio B – had an annualized return over the 15 years of +7.60%.

Portfolio C – had an annualized return over the 15 years of +18.20%.

The S&P 500 had an annualized return over the 15 years of +9.00%.

Second Study

The second study utilized the same universe of stocks as the first study. Here they measured the dispersion of the earnings estimates around the consensus estimate. The standard deviation of the estimates was calculated to determine the rate of dispersion. The higher the dispersion the higher the amount of uncertainty. Since standard deviation is measured in absolute terms, it is necessary to normalize the data. This is done by dividing the standard deviation by the consensus estimate. The key is not how big the standard deviation is, but rather how big the standard deviation is in relation to the projected earnings. The stocks were sorted into the five portfolios and their performance was measured over fifteen years Transaction costs were not factored in.

The Portfolios

In the second study stocks were placed in 5 Portfolios based on a range from low earnings uncertainty to high earnings uncertainty.

 

Second Study Results

Portfolio A +14.30% (low earnings uncertainty)

Portfolio B +11.90%

Portfolio C +12.30%

Portfolio D +9.90%

Portfolio E +5.50% (high earnings uncertainty)

The S&P 500 had an annualized return over the 15 years of +9.00%.

The data suggests buying companies which have lower earnings uncertainty tend to outperform companies with higher uncertainty. The reason is the lower the uncertainty of earnings the more stable a company’s earnings in fact may be. The market tends to reward stable earnings over time.

The Conclusion

Stocks which received upward revisions to current year consensus earnings estimates and show a lower uncertainty of earnings tend to outperform over time. That’s a powerful combination to profit from.

 

With Top Stock Analyzer each week you’ll receive

 

 

Weekly Market Commentary

Our overview of the market action and a view on upcoming earnings and influences for the coming week’s market.

 

 

 

Featured Stock each week

From the top candidates each week, we pick one stock to feature, with in depth analysis, commentary, and technical chart with indicators.

We only monitor a defined list of stocks institutional investors watch and invest in, eliminating low priced / low quality stocks. Our screening and analysis techniques are designed to lower drawdowns and improve portfolio performance over time.

 

 

 

Market Capitalization Ranking

Market Capitalization Ranking helps investors focus on which market cap segments are exhibiting top performance characteristics. The ranking is calculated using market cap performance, relative strength and the concentration of stocks in each market cap sector over the past four weeks. As a best practice over time, it is wise to invest the majority of your capital in the top two or three market cap sectors.

 

 

 

Shortlist of prime candidates for longs and shorts

Long and short candidates depending on market direction. Our short list includes breakdown by market capitalization and supporting earnings and FATI® Score data. PLUS you’ll get Our EPS report alert close to earnings season and our highlighted Favored Stocks.

 

Try Top Stock analyzer for a month (4 issues) for ONLY $9.99

 

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One Last Thought

There are two generally accepted approaches to investing. Fundamental and Technical. Which is better is not up for debate here, but instead consider the following;

The majority of institutional investors focus on and purchase companies based upon strong fundamentals

Professional Traders focus on technical indicators, patterns and news events to determine when to buy or sell a stock

Why choose between two methodologies? Don’t, Use Both. First, use the Top Stock Analyzer to focus on the stocks institutional investors are watching and investing in. Next, use technical analysis to determine when to buy or sell the fundamentally screened stocks.

Top Stock Analyzer + Technical Analysis = MORE PROFITS