Profit from the Conference Call Participant List!
Analyst Interest as an Early Indicator of Firm Fundamental Changes and Stock Returns
- Jung, Wong, Zhang
- A version of the paper can be found here.
- Want a summary of academic papers with alpha? Check out our Academic Research Recap Category!
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.
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:
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!
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?
Note: This site provides NO information on our value investing ETFs or our momentum investing ETFs. Please refer to this site.
Join thousands of other readers and subscribe to our blog.
Please remember that past performance is not an indicator of future results. Please read our full disclosures. The views and opinions expressed herein are those of the author and do not necessarily reflect the views of Alpha Architect, its affiliates or its employees. This material has been provided to you solely for information and educational purposes and does not constitute an offer or solicitation of an offer or any advice or recommendation to purchase any securities or other financial instruments and may not be construed as such. The factual information set forth herein has been obtained or derived from sources believed by the author and Alpha Architect to be reliable but it is not necessarily all-inclusive and is not guaranteed as to its accuracy and is not to be regarded as a representation or warranty, express or implied, as to the information’s accuracy or completeness, nor should the attached information serve as the basis of any investment decision. No part of this material may be reproduced in any form, or referred to in any other publication, without express written permission from Alpha Architect.
Definitions of common statistics used in our analysis are available here (towards the bottom)