Strategies · Library · Stocks
§3.2Factor
Earnings-momentum
Rank stocks by how far the latest quarterly earnings per share beat the figure from a year earlier, scaled by the variability of that gap. Buy the biggest positive surprises and short the biggest negative ones, expecting earnings news to be absorbed slowly.
- Asset class
- Stocks
- Held for
- Months
- Data
- Needs data ARCANE lacks
- Symphony
- Cannot be built as a symphony
The rule
- Signal
- Standardized earnings surprise: year-on-year change in quarterly earnings per share divided by its standard deviation over eight quarters.
- Entry and exit
- Rank after each earnings season; long the top decile, short the bottom decile; hold for a few months.
- Sizing
- Equal or volatility-scaled weights within each side.
How it fails
- Depends on clean earnings data
- Crowded around announcement dates
- Short leg needed
- Surprise effect may be arbitraged away
Data it needs
- quarterly earnings per share history
- daily prices
ARCANE has no earnings or analyst data.
How ARCANE uses it
Not usable until earnings data exists; a Call about an earnings beat would need an outside source.
Needs company earnings history and shorting, neither of which the builder has.
Filed under the factor card
Own companies that are small, cheap, profitable and invest conservatively, against their opposites, and rebalance once a year.
A paper plan from this card holds 63 to 365 days, stops at 2× the expected move and uses at most 75% of your risk budget. The card
Source: Kakushadze and Serur (2018), 151 Trading Strategies, §3.2, p. 42 of the SSRN version. Described in our words. Factor is ARCANE’s filing, not the book’s.