Ok, so who’s excited about earnings season?
If you raised your hand, then Goldman has some knowledge they want to drop on you.
Specifically, the bank is out with a list of their “25 most differentiated ideas ahead of earnings,” which is an unnecessarily euphemistic way of saying this: “here are the 25 stocks where our analysts differ most from consensus.” Here’s the excerpt:
We identify the 25 most out-of-consensus opportunities from our Americas coverage universe in collaboration with our analysts. We see the potential for upward earnings revisions to drive upside in AVGO, CAT, HLT, and RF shares and downward earnings revisions to drive downside in AEO, SPR, and UTHR shares.
And here are the visuals:
In the same report, Goldman goes on to document something “shocking.” To wit:
Alpha is concentrated around earnings events for stocks. Last quarter, the average stock moved +/- 3.5% on an earnings day vs. +/- 0.9% for the stock’s average daily move one month before/after its earnings report.
No, but sarcasm aside, apparently this is a bit anomalous:
The ratio of these numbers (4x) is the highest on record.
We believe there are at least three factors driving volatility to be more focused around earnings events (one cyclical, two structural):
- Macro volatility is low, reducing the average daily move, which for a given earnings day move will increase the ratio.
- Financial disclosure regulations enacted following the 2002 bear market have led company management teams to focus their disclosures on earnings events and to have fewer informal updates between quarters, in our view.
- Earnings events represent a unique type of idiosyncratic volatility that some quantitative investors may avoid but some quantitative investors may seek out. This shift in market participants on the day of earnings may drive additional volatility, all else equal.
Finally, in a nod to a note out a couple of months ago, Goldman again observes that call buying ahead of earnings has been a consistent way to generate outsized returns:
Call buying ahead of earnings has consistently outperformed. Call buying has been profitable ahead of earnings in each of the past 7 quarters, as well as each year on aggregate since 1996. The low level of the VIX ahead of this earnings event bodes well for option buying profitability in general. Call buying profitability is driven by systematically underpriced at-the-money options as well as the bias of stocks to trade up on earnings events.