On the Profitability of Portfolio Strategies Based on Analyst Consensus EPS Forecasts

39 Pages Posted: 29 Nov 2014 Last revised: 24 Feb 2017

See all articles by Rainer Baule

Rainer Baule

University of Hagen

Hannes Wilke

FernUniversität in Hagen

Date Written: January 11, 2017

Abstract

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

Suggested Citation

Baule, Rainer and Wilke, Hannes, On the Profitability of Portfolio Strategies Based on Analyst Consensus EPS Forecasts (January 11, 2017). 28th Australasian Finance and Banking Conference Paper; 2016 Financial Markets and Corporate Governance. Available at SSRN: https://ssrn.com/abstract=2531810 or http://dx.doi.org/10.2139/ssrn.2531810

Rainer Baule

University of Hagen ( email )

Universitaetsstrasse 41
Hagen, 58097
Germany

Hannes Wilke (Contact Author)

FernUniversität in Hagen ( email )

Hagen
Germany

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