What this means on a larger and longer-term scale (of months) is that analyst opinion can really influence the flow into, or exit of capital from, a particular stock. One of the key criteria analysts work from is Earnings Surprises since, when a firm reports higher than forecasted earnings, analysts will generally revise their opinion upwards quickly or at the very least track the reporting company more carefully and thoroughly, since they don't like to be wrong or caught out. When the new opinion trickles out, the stock can start to take off.

There are independent firms that rank companies on various criteria including earnings surprises. For example, the Value Line Investment Survey Summary and Index, published weekly, has a list of Timeliness ranks. A sample can be found at Value Line. Generally when Value Line changes a company's timeliness rank to 1, it is because the company has reported a surprise increase in earnings.

Such ranked companies tend to outperform the averages quite regularly; you can follow some recent earnings surprises from Nasdaq and see for yourself how they do as a group in the following months.

"Companies that report large positive earnings surprises continue to outperform the market and beat analysts' expectations up to three years later, according to a business school study.

By contrast, firms that disappoint Wall Street by delivering extremely bad news perform poorly afterward, producing negative stock returns during the subsequent three-year period—although there are no clear differences between companies reporting large versus small earnings disappointments." - See Article


"Results presented in this study strongly suggest that the buy/short trading strategy based on the foreknowledge of earnings surprises has been profitable in all US sectors for the quarters 1999.2 through 2003.3; it is especially effective in the technology and finance sectors with a success rate of 17 out of 18 quarters. Consistent with prior studies, this study finds that the portfolios with extreme positive earnings surprises persistently outperform those with extreme negative earnings surprises and the return spreads between the two portfolios in each of the sectors in the sample are significant statistically over the quarters examined. The study confirms that it is extremely rewarding to accurately forecast the sign and magnitude of the earnings surprises and formulate the investment strategy accordingly even in the recent bear markets. These findings are against the strong form of efficient market hypothesis. As demonstrated in the study, the market is clearly inefficient in its strong form since there is money to be made from trading based upon the private information of earnings surprises." - See Article

 We can get a head start even on Value Line by selecting a few stocks that are good on most criteria but 2 or 3 at best on Timeliness, and monitoring the news for these companies using Google Alerts (you can have alerts emailed to you whenever Google indexes a news page with your search criteria.). If a stock we are monitoring reports a positive earnings surprise, we could then buy it in the expectation that both Value Line and Wall Street analysts will upgrade it accordingly, causing buying volume to push the price up further.

If we are clever we will look for stocks we consider to be undervalued by whatever value investing criteria we employ and monitor these, waiting for a positive earnings surprise to be the catalyst that will reverse a down or sideways price trend.