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EARNINGS SPEAK, pt. II 🧮

Predicting returns based on analyst commentary on earnings calls… sexy I know

Every now and then I get a little hunch I gotta explore. Today was one of those days. After reading a few earnings transcripts over the past few weeks, I wondered: could you predict a company’s post-earnings performance based on how excited (or subdued) the analysts are on the call?

First, for those unfamiliar with how earnings calls work: 

• each quarter, public companies are required to host a conference call between its management, analysts, investors, & the media to discuss their quarterly results.

• these calls tend to be a self-indulgent ass-kissing festival for most companies; they focus heavily on the bright spots (never the bad stuff), and allow the analysts to lob a few softball questions to make themselves look astute.

Honestly, they’re usually pretty boring. 😴

But if you look closely, you begin to notice some interesting dynamics — how many analysts actually show up for the call, how many questions they ask (or don’t ask), how many ‘atta-boys’ they pat on the company’s back.

These are the little things that can say a LOT. And maybe (just maybe) if you listen to enough calls, you can begin to play these little nuances and guess what the stock will do after the call. So, let’s see what would happen if we tried:

DECIPHERING ANALYST-SPEAK:

I, for one, am not the type to listen to every earnings call. Too many of em. I’d rather pull some earnings transcripts into a database and used some text-processing to do the work for me. So that’s what I did.

APPROACH:

• First, I went through the last 1,000 transcripts in the Motley Fool’s earnings directory, and parsed out all the commentary made by analysts (each comment is labeled with who said it, which makes this pretty easy).

• From there, I counted up the # of analysts on each call (vs. the # of management members), and calculated the sentiment of each of their comments (to see who was excited about the results & who wasn’t).

• Finally, I grabbed the percent change in stock price in the 24-hours following each company’s earnings call (relative to the broader market, ie. the S&P 500).

Now, my hunch here was that smaller companies with a lot of analyst interest would be most susceptible to price fluctuations driven by analyst commentary. And lo & behold, that’s exactly what we see:

RESULTS: over the previous 2 quarters1, small-to-mid cap companies with high analyst interest (ie. those with above-average analyst attendance) tended to increase in next-day stock price when analyst commentary was mostly positive, & decrease when commentary was negative. The correlation was considerable here.

In other words; analyst earnings commentary does seem to affect price movement. Huzzah. But okay, I know what you’re all thinking — “if that’s true, why not trade on it?”

Well, I did. Here’s what would have happened if you traded on it: 👇

PREDICTING RETURNS:

For this I decided to widen the pot to include all small-to-mid cap stocks (to improve our sample size a bit). There were 566 earnings that fit our criteria (companies with <$20B in market cap and at least one analyst comment during their earnings call).

I went back and modeled what would have happened if you bought these stocks at the end of a positive earnings call (ie. net-positive analyst sentiment) & sold them the next day — the opposite for negative calls. The results were pretty impressive:

RESULTS: if you traded small caps solely on analysts’ net earnings sentiment on calls between May and December, you would have made a +568% return on your initial investment — a principal of $1,000 would now be worth $5,681. Wow. 🤯

• Most of these trades would’ve hit during hot earnings weeks (unsurprisingly) — ie. the middle of August during Q2 earnings szn, and again late October.

• Positive & negative calls were surprisingly even in numbers; there were 298 net-positive analyst calls (52%) and 267 net-negative calls (48%)

• Positive calls performed slightly better than bearish calls, returning +1.78% the following day on average (vs. 0.02% for bearish on average)

• The best-returning earnings to play would have been SkyWater Technology (SKYT)’s positive Q3 call on 11/7 (+33%), and Emergent BioSolution (EBS)’s highly negative call the following day (-37%)

All in all, I am pretty impressed that the strategy actually could have ~worked~

Of course there are always a few caveats; the Motley Fool’s database is still a relatively small sample size in the grand scheme of things, our sentiment algorithms could always be better, and we could have just gotten lucky with the time period we ended up picking. But nonetheless, it goes to show that perhaps there is something to analyst hype (or lack thereof) after all.

That’s all for today my peeps. If you’d be interested in checking out the database & calculations I used to create this analysis, lmk by liking, commenting, or replying to this email. Thanks & talk later. ✌️

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DISCLAIMER: None of this is financial advice. This newsletter is strictly educational and is not investment advice or a solicitation to buy or sell any assets or to make any financial decisions. Please be careful and do your own research.

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