A Requiem for SUE

Abstract

We believe that standardized unexpected earnings (SUE, a.k.a. earnings surprise) has lost its power as a stock selection tool. The concept of surprise, acting on new information that was not previously reflected in stock prices, may still have merit. But measuring results versus expectations just before the announcement has been fatally compromised in our view by manipulation of expectations and earnings—a phenomenon that was unwittingly unleashed by SUE herself. We believe that other quantitative factors offer better hope for positive performance in the future, including earnings estimate revisions, valuation-based factors, and measures of earnings quality.