The Relationship Between Changes in Analyst Consensus Earnings Forecasts and Subsequent Share Returns on the Johannesburg Stock Exchange

Abstract

Sell-side company analysts are most likely to be closest to a company’s financial health, will be privy to new information, and run models that process new information into meaningful expected changes to future earnings per share. Importantly, data vendors collate analyst’s individual Eps forecasts and publish consensus median Eps forecasts for the next three financial year-ends. A change in a median consensus forecast should be followed directly by a commensurate change in share price. We run a style analysis over 16 years, ranking quintile portfolios by the year-on-year change to Eps forecasts three months after portfolio formation. We find strong and consistent evidence that subsequent return is highly positively correlated with Eps upgrade. We vary both look-back and look-forward periods from one month to 12 months, confirming that three months forward, and 12 months backward, are optimal settings to maximise alpha. The effect is concentrated in the outer quintiles, with significant alpha generated when we move to decile portfolios.