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Consensus of forecasts can help predict share drifts

Consensus of forecasts can help predict share drifts

Consensus of forecasts appears to be an accurate predictor of post-earnings-announcement drifts in share price, according to research from the Melbourne Business School (MBS).

MBS analyst Leon Zolotoy said when multiple investor groups predict earnings per share that are lower than the posted figure, the resulting added investment leads to a higher increase in share prices than would otherwise occur. The obverse is also true.

But when one investor group predicts higher earnings per share than actual, and the other forecasts lower earnings per share, the invetors will pull in different directions and the holding period return will remain stable.

“Where there is consensus about the prediction error being positive you should buy the portfolio of stocks. Where there is consensus the prediction error is negative you should sell the portfolio of stocks. And where there is no consensus you may as well leave stocks alone,” he said.

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