Profit from the Conference Call Participant List!

Profit from the Conference Call Participant List!

June 12, 2014 Research Insights
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(Last Updated On: January 18, 2017)

Analyst Interest as an Early Indicator of Firm Fundamental Changes and Stock Returns

Abstract:

In this study, we propose that an increase in analyst interest in a firm — measured by the onset of analysts who do not cover a firm but participate on that firm’s earnings conference call — is an early indicator of improvement in a firm’s future fundamentals and capital market activities. We find that a change in analyst interest is positively associated with future changes in earnings and sales. Analyst interest also precedes changes in capital market activities such as analyst coverage, institutional ownership, and trading volume. Finally, we find that analyst interest is positively correlated with future stock returns. Overall, our results suggest that analyst interest is a leading indicator of firm fundamentals and offers a one-step-ahead advantage in analyzing stock market dynamics.

Alpha Highlight:

The authors try to identify if analyst interest predicts future stock returns. Analyst interest is defined as a situation where analysts are joining a firm’s conference call, but haven’t yet begun formally covering the stock. The idea is outlined in the figure below:

fig1
The results are hypothetical results and are NOT an indicator of future results and do NOT represent returns that any investor actually attained. Indexes are unmanaged, do not reflect management or trading fees, and one cannot invest directly in an index. Additional information regarding the construction of these results is available upon request.

The trading strategy around this concept is super interesting. Note that asking questions on conference calls occurs near the tail end of the coverage initiation process. Thus, you could go long stocks with a lot of analyst interest, because this is an indication some of them might initiate coverage, as they perceive potential good news in the future for the stock.

What are the results for a strategy that goes long a basket of “high analyst interest” stocks? The table below suggests 52bps/month, or over 6% a year. The strategy does load on small caps, so you might run into some liquidity issues, but overall, not bad!

The results are hypothetical results and are NOT an indicator of future results and do NOT represent returns that any investor actually attained. Indexes are unmanaged, do not reflect management or trading fees, and one cannot invest directly in an index. Additional information regarding the construction of these results is available upon request.
The results are hypothetical results and are NOT an indicator of future results and do NOT represent returns that any investor actually attained. Indexes are unmanaged, do not reflect management or trading fees, and one cannot invest directly in an index. Additional information regarding the construction of these results is available upon request.

 

Start paying attention to who is on the conference call, as you just might be picking up on a valuable signal!

Anyone toyed with this idea in the past?


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About the Author

Wesley R. Gray, Ph.D.

After serving as a Captain in the United States Marine Corps, Dr. Gray received a PhD, and was a finance professor at Drexel University. Dr. Gray’s interest in entrepreneurship and behavioral finance led him to found Alpha Architect. Dr. Gray has published three books: EMBEDDED: A Marine Corps Adviser Inside the Iraqi Army, QUANTITATIVE VALUE: A Practitioner’s Guide to Automating Intelligent Investment and Eliminating Behavioral Errors, and DIY FINANCIAL ADVISOR: A Simple Solution to Build and Protect Your Wealth. His numerous published works has been highlighted on CBNC, CNN, NPR, Motley Fool, WSJ Market Watch, CFA Institute, Institutional Investor, and CBS News. Dr. Gray earned an MBA and a PhD in finance from the University of Chicago and graduated magna cum laude with a BS from The Wharton School of the University of Pennsylvania.