When it comes to predicting to future direction of stock prices, not all earnings surprises are made equal, says a new report from Chad McAlpine, quantitative analyst, RBC Capital Markets.
Citing a 2006 study from scholars Narasimhan Jegadeesh and Joshua Livnat, Mr. McAlpine said earnings beats primarily driven by better-than-expected revenues lead to better stock performance than profit surprises due to lower-than-expected expenses.
"Several studies have found that when earnings surprises are accompanied by revenue surprises, the change in earnings is more likely to persist in future periods, and a greater drift in [stock] price can be expected," he said
"However, when earnings surprises are caused by expense surprises, the amount of post-earnings-announcement drift is generally less."
Mr. McAlpine identified 16 stocks that have announced both an earnings and a revenue surprise this quarter. They include Corus Entertainment Inc., Cogeco Cable Inc., AGF Management Ltd., Astral Media Inc., Industrial Alliance Insurance, Jean Coutu Group Inc., BCE Inc., EnCana Corp., Loblaw Companies Ltd., Open Text Corp., Celestica Inc., Gildan Activewear Inc., Inmet Mining Corp., Canadian REIT, TMS Group Inc., Shaw Communications Inc.
As of this past Wednesday, 39 of 68 companies have announced positive earnings surprises, with 24 associated with revenue surprises, and 14 resulting from expense surprises.
Mr. McAlpine noted that revenue surprises were responsible for the majority of earnings surprises in every sector except industrials where expense surprises have outpaced revenue beats by a margin of two-to-one so far.