Should you buy or sell the monster of the web here at $900? Many institutional growth investors with a long-term horizon will keep their shares and probably even add to holdings here because they don’t want to miss the ride to $1,000. But the recent spate of downward earnings estimate revisions brought the GOOG down to a Zacks #5 Rank this week. And that means, at least in the short-term, there is reason to be cautious. A Quant Model All About EPS Momentum Before I show you the damage to GOOG estimates, let me explain how the Zacks Rank works. We collect all analyst earnings estimate revisions (EER) every day for roughly 4,400 stocks and throw them into our quantitative model. The model classifies the EER based on the percentage of analysts in directional agreement, the magnitude of their changes, and to a lesser degree the potential for upside surprises. The top 5% of stocks with upward revisions (about 220 names) get the coveted Zacks #1 Rank Strong Buy designation. The bottom 5% of stocks with downward revisions (also about 220 names) get the dreaded Zacks #5 Rank Strong Sell mark. This model has beaten the market by over 2-to-1 for the last 3 decades. It has purely numerical inputs and produces purely mathematical outputs that can change every day. But the reason the model and its relationships — discovered in 1978 by Len Zacks, a PhD from MIT — work so well is because earnings momentum is one of the consistently strongest predictors of stock price movement. Why? Because it’s usually the number one input of professional investors into their stock-picking and valuation models. And we all know who moves stocks the most, the institutions with their many billions of dollars all ear-marked for stocks. The GOOG EER Slash & Burn Below are 3 tables we look at every day when evaluating the earnings momentum of stocks. What you see here is the hard data that put GOOG in the cellar relative to the estimate revisions of 4,399 other stocks. (Click image to enlarge) The main take-away here is that the majority of analysts made downward revisions to quarterly and full year estimates for the next 18 months. In aggregate, this year was taken down by 8% and next year by 6.4%. While the longer-term growth story may still be intact here, with 18% EPS growth projected for next year, the recent slash and burn of estimates should alert you to some simple warning signs. First, once a big earnings miss and change in guidance occurs, it often takes time for the analyst community to react and catch up. Here, most of the 14 covering analysts reacted quickly. But it doesn’t mean they are done “adjusting” their growth outlook. Second, if the trend of downward EER continues, it could take another quarter or two of better news from the company before it turns around. The question you have to ask is, “Do I want to accept the risk of …read more
Source: FULL ARTICLE at Forbes Latest
