Stockopedia’s Ahead Of Expectations Study
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Need a leading indicator for stock price direction? Well, In today’s video, we cover Stockopedia’s Ahead Of Expectations Study, an interesting study on how earnings releases from companies drive share price momentum. The study outlines how “ahead of expectation” sales and profit numbers impact stock prices on the day of the announcement and in the days that follow.
The frequency of company announcements varies, as there are no regulations dictating their timing, making most voluntary. However, annual and half-yearly financial statements are mandatory. In the chart showing the reporting season, trading statements (denoted by the blue line) are evenly distributed throughout the year, with peaks each quarter. In contrast, financial statement reporting is concentrated in April-May and October, aligning with the UK financial year, which starts and ends in April, placing the half-year mark in October."
Once these statements are released, the numbers are compared with the expectations amongst the market participants and analysts. In cases where the company is not well known or well covered, the numbers are compared with the management’s past expectations about the financial performance.
Stockopedia analysed over 2,700 trading statements over the last two years, to look for catalysts that would have driven the stock prices in a certain direction. They took the actual vs expectation comparison of these statements, bucketing them in three broad conclusion categories.
1. Ahead of Expectations
2. Inline with expectations, and
3. Behind Expectations
When the numbers are in line with expectations, there is no element of surprise, and hence, there is no significant activity in the stock price after the release of the statement.
However, things change when the numbers are ahead of or behind expectations. As there is a surprise element involved, the ahead of expectations are rewarded with higher stock prices as investors rush to board the momentum train. On the other hand, when the numbers disappoint or are behind expectations, the market rushes to punish the stock price to reflect the changed reality.
Now, there are two parts to this reaction. First, what happens on the day of the release, and the second, how the price reacts afterwards. The study finds that most earnings hits and misses lead the stock price to drift further in the direction of the first-day move. Therefore, a positive surprise leads to a higher price on day one and a continued momentum in days, weeks, or months that follow.
Here is a chart from the study showing how prices drift further in the direction of the surprise for days and months.
These surprises can serve as major turning points, often leading to multi-fold stock price gains as subsequent financial releases bring further positive surprises. The likelihood of this outcome increases when companies report performance that is 'significantly ahead of expectations'.
Stockopedia presented data to back this up. So, in this bar chart, Stockopedia shows that companies that report “significantly” ahead of expectations numbers are 31% more likely to announce ahead of expectations performance in the next release. They report inline performance one out of four times and a negative surprise only 10% of the time.
This indicates that the odds are much more favorable if you chase stocks that post “significantly ahead of expectations” numbers.
The same is the case with profit warnings as concluded in an earlier study by Stockopedia on 245 profit warnings in 2016. A little over a third of companies warned more than once.
Next, Stockopedia analysed the strength of the drift, putting the next six-month performance of the stocks alongside their first day performance. Here is the chart showing the six-month performance of stocks categorised by their announcement day price change.
This shows that there is a big correlation between the quantum of price change on the announcement day and its performance in the next six months. A 20% change on day one led to a similar increase in the next six months. The correlation here is much stronger on the upside than on the downside.
This supports the idea that an 'ahead of expectations' announcement is often followed by another within months. As a result, share prices tend to jump on the news, drift higher, consolidate, and then repeat the cycle—forming what Nicholas Darvas described as a 'box pattern. The concept is exactly what we look for in our group, by using our bespoke scanner we can find Quality stocks breaking out of consolidations in the major exchanges from around the world, links can be found below.
Performance drift from earnings reports is even more pronounced when the phrase “significant” is used to emphasize the degree of the surprise. In this chart, Stockpedia showed how the correlation was massively altered with the announcement day move, when the performance was significantly ahead or behind expectations.
The study can be summarised into three findings and three rules.
The findings are:
1. Price momentum continues in the same direction as it did on the day of the announcement
2. “Significantly” ahead or below announcements experience the strongest drift
3. A larger first day jump equals stronger ensuing price returns
Therefore, the rules are:
1. Look for companies which have announced (or are on a streak of) a positive update
2. Look for big share price movements on the day of the announcement
3. Look for companies which are using the phrase “significant” in their updates
Let’s look at some case studies from the data on how the phenomenon played out in recent times.
Here is the chart of Yu Group which first announced a “significantly ahead” trading statement in October-November 2022. It then continued to report “ significantly ahead of expectation numbers”. With five such updates, the stock price more than tripled in one-and-a-half years - a kind of multibagger offering solid equity growth.
The second case study is Filtronic. The stock saw a 48% price jump on the trading update in May 2024, and then saw a 97% increase in the next six months, demonstrating how a strong strong announcement day move is further followed by a big drift.
Next we see Sanderson Design, which shows how the phenomenon worked on the downside. Starting February 2024, the company gave four back-to-back pessimistic releases. The first release said that the business is facing challenging conditions. The subsequent gloomy releases led to a 50% decline in stock price from the announcement day price in February 2024.
To make this study more actionable, Stockopedia shares an important insight. Most of the stocks with multiple “ahead of expectation” announcements and huge stock price drift, follow two key trends - low expectations and multiple positive updates.
Contrary to popular belief, it’s often inexpensive value stocks rather than premium growth stocks that respond the best to “ahead of expectations” announcements. That’s because lower growth companies in sectors which aren’t seen as especially exciting are often overlooked by private investors and fund managers chasing biotech and AI stories. These stocks typically suffer from low expectations due to suppressed share prices and limited broker coverage. When good news finally comes, market expectations often fail to adjust quickly enough. If you are an “ahead of expectations” seeker, it pays to be a value investor.
The second interesting phenomenon in ‘ahead of expectation’ research is that these announcements often come in multiples. That is because ‘ahead of expectation’ updates can be pointers of pending operating leverage - where sales and margins are expanding simultaneously. When this happens, the P/E multiple can expand too. That’s a recipe for multibagger returns - high earnings growth plus P/E multiple expansion.
The study highlights how a basic system can help identify big winners and help you garner robust returns year after year. At any given time there will be multiple stocks reacting strongly to ahead of expectation numbers. All you need to do is pay attention to price jumps and understand the underlying degree of earnings surprise. A use of phrases like “materially” or “significantly” is a leading indicator in such cases.
If you own a stock that announces it’s “ahead”, and whose share price jumps - don’t sell. Stay invested for the next six months at least. When buying on a positive announcement, again, don’t trade short term, let the post-earnings share price drift do its thing. It should be noted that the study was based on UK stocks only, although the theory would undoubtedly be found across the globe.
If done with discipline, following proper risk management, this could be a robust system to follow, better still, incorporate into your own existing approach.
If you want to read the entire study and webinar recording, or take advantage of a 25% Stockopedia discount, use the links below.
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