Here we are at the start of the 2nd week of May and earnings season is beginning to wind down. Around 3/4ths of companies have reported their Q1 earnings so we are definitely seeing fewer firms report. It has been a solid earnings season for the S&P 500 as more companies have reported stronger than expected earnings results. The markets have remained stable through the majority of the reporting season.
We track earnings season very closely for one big reason: our Internet Advantage Strategy. Our investment premise is simple: invest in a diversified portfolio of equities that are producing more revenue/EPS than the market thinks they are producing.
Obviously, our returns are the most natural report card for how we are doing. And the last 12 months have been very strong. But there is another way that we (and you) can validate that we are producing strong picks that are likely to perform. How do the companies that we are invested in deliver on their earnings announcement? Did they beat on revenue? Did they beat on EPS?
You will see a strong correlation between our portfolio’s returns and the ability for the portfolio to be invested in firms that are beating on revenue and EPS. Check out this chart below. You can see our improvement in finding companies that out-perform on earnings and EPS together and how it has gotten better in the recent time frames. And that of course corresponds to the best 12-month window we have ever produced in returns in the Equity strategies.
So, how are we doing inside this most recent earnings period? As of close of business Monday, we have been invested long in 23 stocks that announced earnings between April 1, 2017 and May 8, 2017.
% of stocks that Beat on Revenue estimate – 87%
% of stocks that Beat on EPS estimate – 87%
% of stocks that Beat on Both estimates – 78%
As you can see, so far in this current earnings period, our equity picks are excelling compared to our historical numbers. If this holds up, it will be our 4th consecutive earnings window finding revenue surprises on at least 79% of our bullish investments.
In general, as long as we find revenue surprises on at least 70% of our picks, we believe we can create alpha – though specific market conditions will matter and it isn’t a certainty. When we find revenue surprises in the 80%+ range like we have recently, we expect to produce more significant alpha like we have for the last 4 quarters.
As an advisor or investor in this strategy, ultimately, if you want to see how we are performing, don’t just focus on the returns. Give us a call and ask to review the latest earnings results. If we are producing alpha, you should be able to see it in the ability for our picks to find revenue and EPS surprises.
*Chart disclosure: Earnings comparisons presented reflect every actual realized and unique bullish trade in the Equity strategies deployed by ZEGA Financial using the Alpha DNA research. The two strategies are the Internet Advantage Strategy (IAS) Best Equity Picks and the Internet Advantage Strategy Equity Long/Short. A unique trade is every realized trade (ie, open and closed) from October 2014 to December 2016 that is unique based on combination of stock symbol, open date, and close date. The data presented is only included in the summary if the stock position was held the day prior to and day of earnings. The data source for EPS and Revenue forecasts is FactSet.