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A simple trend with a high win rate for investors

Steve Clapham illustrates how to understand earnings estimates and use them to your advantage
A simple trend with a high win rate for investors

I prefer to buy stocks when profit forecasts are increasing. When I was an analyst at large hedge funds, one of the main checks I made to see whether an idea was worth pursuing was to look at the trend in earnings estimates.

If estimates are falling, I need to be comfortable that the trend is about to reverse, if I am considering a long position. Share prices usually follow estimate revisions, so if a share price has been rising and the estimates have been falling, that would be an unusual signal and perhaps worth investigating.

But most of the time, we see shares go up when the consensus of analysts’ forecasts rise. This consensus is simply the average of the estimates of the analysts following the stock. This is often one of the most important parameters followed by fund managers and it’s something that companies’ investor relations departments also track closely. It’s worth understanding how it’s constructed and used.

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