What are we looking for?
Medical-marijuana producer Aphria Inc. on Monday reported its third-quarter earnings of 8 cents a share – handily beating the consensus Street estimate of 1 cent – and its shares rose more than 8 per cent after the market opened. Today, we look for companies reporting next week that are likely to have this kind of positive earnings surprise.
The screen
The consensus Street estimate gives all equity analysts’ estimates equal weight, but, as with most other professions, not all analysts are equally accurate. The SmartEstimate improves upon the Street estimate by taking into account how accurate the analyst has been in covering the stock in question in the past, as well as how timely the estimate is (an estimate made yesterday, with all currently available information, is more valuable than one made 200 days ago).
SmartEstimate further improves upon the Street estimate by looking at clusters of revisions. If a number of analysts revise their estimates in the same direction at the same time, it stands to reason that a new piece of information has emerged that they are all taking into account. Any estimate that hasn’t been revised since this time is considered stale (based on old information) and omitted from our calculation. These modifications make the result a more predictive number; in the past, when the SmartEstimate has diverged from the Street consensus by more than 2 per cent, this has predicted the direction of earnings surprise with an accuracy of 70 per cent.
Our universe for the screen is the S&P/TSX Composite Index. Among companies reporting earnings next week we look for companies where the earnings per share (EPS) SmartEstimate is at least 2-per-cent greater than the Street estimate.
Next, we consider the longer-term quality of the stock using the Thomson Reuters Combined Alpha Model. This is a model that considers valuation (both relative and intrinsic), price momentum (short-, medium-, long-term and industrywide), analyst sentiment and earnings quality. We assign companies a percentile score, with all Canadian stocks as the peer group, and require a score of at least 70.
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What did we find?
The company passing the 2-per-cent Predicted Surprise threshold with highest Combined Alpha score is Methanex Corp., which is expected to report quarterly earnings next Tuesday. The Street EPS estimate is $2.19 a share. This average is pulled down by the lowest estimate of $1.87, by an analyst that happens to be the least accurate, according to Thomson Reuters. The most accurate analyst, Benoît Laprade from Scotiabank, has the most optimistic prediction at $2.53. The company should benefit from a strong long-term demand for methanol, which it produces, as well as the recent rise in the price of oil.
Investors are advised to do further research before investing in any of the companies shown here.
Hugh Smith, CFA, MBA, works in the financial and risk unit of Thomson Reuters and specializes in wealth and asset management.