Earnings estimates systems

General
1

I build some new earnings estimates systems and I would like to know if I did a mistake on the system design because the backtesting results seem a bit to positive.

I am sure there are no problem with the ranking system (in use for years and profitable), it does not use any stuff on earnings estimates, I put that into the buying filter.

Know the buy rule I need to get some feedback on:

FRank(“(CurQEPSMean-CurQEPS4WkAgo) / CurQEPS4WkAgo”,#all,#DESC, #ExclNA) > 90

  1. Question: is the buy rule o.k. in terms of that it picks the stocks with the best eps revision within
    the last 4 weeks?

  2. Is there still a difference between simulations and live strategies on how they capture the eps data especially when I am using the daily rebalance on the simulation.

  3. Where could be pitfalls in terms of that I do simulate something that might not work realtime.

Thank you!!!

Best Regards

Andreas

2

Andreas, I use a similar formula as a factor in some of my systems, but I would recommend using the absolute value in the denominator:

(CurQEPSMean - CurQEPS4WkAgo) / Abs(CurQEPS4WkAgo)

As is, your formulation would flip upwards/downwards revisions when the EPS estimate from 4 weeks ago was negative.

I’d have to defer to on the live/sim questions to the p123 team.

3

Short version

%(CurQEPSMean , CurQEPS4WkAgo)

4

Thank you all!!!

1 Like
5

Everyone’s comments are correct on this topic, I believe. I use this formula-as it is written–without modification.

@Marco: Thanks for the tip on another way to code this.

But briefly (just to expand the topic a little), strange things start happening when Abs(CurQEPS4WkAgo is a small number.

Interesting things happen because this number can be zero can’t it? Or close to hero.

Taken to the extreme if Abs(CurQEPS4WkAgo) is zero, then a one cent change in the earrings estimates represents an infinite PERCENTAGE increase in the earnings estimate, does it not? Or a one cent change in the earnings estimates can rocket a company to the top in a ranking system that weighs earnings estimates heavily.

If I remember correctly (which I don’t always) Yuval is aware of this and has had some ideas on how to deal with this. I have looked at his ideas and tried them as well as some of my own. It has been a while.

Interestingly, I think the formula does well without midification even when the denominator is small (again agreement with Marco on this).

I am hazy on the details but without going back I think I made $250,000 in one day on Turtle Beach where a very small change in the earnings estimate (magnified by a small denominator) put it at the top of my ranking system (and it beat the earnings estimates when they were announced). The limited amount of backtesting I have done has not encouraged me to make a change in the formula. This formula (without modification) is used in Zacks screener. So it is an established formula that is used outside of P123.

So I am not recommending any modification nor would I suggest looking an any particular direction if you want to explore modifications.

FWIW. Just an observation without a recommendation at this point.

Jim

1 Like
6

(CurQEPSMean - CurQEPS4WkAgo) / Max(0.05,Abs(CurQEPS4WkAgo))

This is not at all precise, but it lessens the impact of close-to-zero past estimates on a ranking system. I generally only use this kind of workaround when the weight of the factor is pretty high.

8

How is CurQEPSMean calculated?

Thanks
Tony

9

It’s simply the average of all analyst estimates for the current quarter’s EPS. There’s more flexibility if you use the ConsEst function.