Earnings Revisions and Portfolio Returns

Abstract

This article examines the performance of portfolios formed using analyst revisions to earnings forecasts. The extensiveness of revisions significantly affects stock prices, and the post-revision drift lasts for several months. The effect is stronger for earnings forecast downgrades than for upgrades. Portfolios that also use price momentum or market-to-book information are no better than portfolios formed using earnings revision momentum alone. The results are consistent with the idea that return momentum may be due, in part, to earnings revision momentum. Portfolio managers can use earnings revision momentum to form higher-return portfolios, especially when shorts, put purchases, or call sales are allowed.