On the Profitability of Portfolio Strategies Based on Analyst Consensus EPS Forecasts
39 Pages Posted: 29 Nov 2014 Last revised: 24 Feb 2017
Date Written: January 11, 2017
We measure the profitability of investment strategies relying on analyst earnings-per-share forecasts. We introduce two measures of stock misvaluation, which relate analyst forecast momentum to the contemporaneous stock returns. Employing a 40-year window and a highly liquid US stock universe, we analyze portfolio strategies based on these two measures and show that self-financing trading strategies yield annualized Fama and French five-factor alphas of up to 9.7%. These strategies clearly outperform existing pure earnings-forecast momentum strategies and remain profitable after transaction costs.
Keywords: analyst research, earnings per share consensus forecasts, market efficiency, information content, portfolio strategy, investment profitability
JEL Classification: G10, G11, G12, G14, G17
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