Stocks with poor EPS hit more in downtrend

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Over the last week, the BSE Sensex recorded a steep fall of 1,060.99 points.   -  Reuters

Chennai, February 15

In India, market participants tend to penalise stocks with poor earnings revisions more during downward and neutral market periods, says Akash Jain, Associate Director, Global Research & Design, S&P BSE Indices.

However, the portfolio of stocks with poor EPS change outperform the base universe with significant excess return during upward market trends.

Jain, in his study on ‘Do Earnings Revisions Matter in India’, found that while stock prices tend to move in the same direction as their earnings revisions in the majority of pan-Asian markets, in India, an equal-weighted top quintile portfolio of EPS Diffusion (updward revision vs downward) and EPS Change (change with respect to previous quarter) strategies generated an excess return of over 8 per cent and 4.5 per cent (CAGR), respectively, over the 11 years ending December 2016.

This would indicate that market participants in India tend to disregard earnings downgrades when the market is bullish, said Akash Jain.

The study also notes that size bias was not an important driver of excess returns for the earnings revision strategies in India.

Published on February 15, 2018
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