Profit from Pessimism: Finding Value When a Company's Outlook is Poor

Andrew Stotz  |

Profit When Professionals Get it Wrong

My research covering 4,000 companies across the world shows that, over the past 22 years, financial analysts have been wrong in their earnings forecasts about 33% of the time. This dismal record implies that considering the companies for which analysts are most bearish could actually help an investor find stocks that may perform well. Three such stocks in Asia are: Globe Telecom Inc. ($GLO-PH) in Philippines, Sino Thai Engineering and Construction PCL ($STEC-TH) in Thailand and Petronas Gas ($PETGAS-KU) in Malaysia.

Can Analysts Forecast the Future? A Look at 22 Years of Forecasts

In one of my recent studies, I looked at how well financial analysts, on average – or what we call consensus – predicted the earnings of the companies they cover. To do this, I gathered 12-month average forward earnings forecasts for 4,000 large companies around the world for the past 22 years. I then compared each year’s actual earnings to what analysts had forecasted 12 months before. I disregarded whether the analyst’s forecast ended up being above or below the actual earnings, but rather just considered the absolute deviation.

Sadly, analyst forecasts are off by about 33%, adding almost no value. My main finding was that analyst forecasts are generally off by about 33%, meaning that if the earnings of a company ended up being $100, the analysts on average forecasted that the earnings would be about $133 or $67. Quite a difference! In fact, it’s so big a difference that in some situations, aggregate analyst forecasts could possibly be adding no value at all. Of course, one individual analyst may be better than others. But to profit from them, an investor would then have to find that analyst, and that analyst would need to persist in her success after being discovered.

Analysts May Add Most Value Where they are Most Pessimistic

At times, I have found treasures in Asia where analysts are most negative. When this happens, sentiment for that stock is so depressed that it is more likely to have a positive surprise in earnings than the other way around. That positive surprise often drives up the stock price.

In Asia, a few companies are currently viewed negatively by the average financial analyst and I think are therefore worth considering. Globe Telecom, the second largest telecommunications service provider in the Philippines; Civil and mechanical contractor to both the public and private sector in Thailand, Sino Thai Engineering and Construction; and Petronas Gas, Malaysia’s natural gas processor and distributor. All have analysts saying that earnings growth will be very low. Like most of Southeast Asia right now, none of these stocks are cheap, trading at 18-24x PE, but all are strongly profitable, and could eventually beat analyst expectations.

DISCLOSURE: The views and opinions expressed in this article are those of the authors, and do not represent the views of Readers should not consider statements made by the author as formal recommendations and should consult their financial advisor before making any investment decisions. To read our full disclosure, please go to:



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