Despite 'Surprise Earnings', Stock Price Remains Unmoved... Analyzing the Reasons

Best Performing Stocks with Surprise Earnings for Two Consecutive Quarters
Growth Slows After Three Consecutive Earnings Surprises

Investing in Sectors with Improved Performance Following Initial Surprise Earnings

[Image source=Yonhap News]

[Asia Economy Reporter Ji Yeon-jin] In the domestic stock market, it was found that stocks recording their first 'earnings surprise' and then announcing results exceeding forecasts in the next quarter saw a sharp rise in returns. However, stocks that reported surprise earnings three times in a row performed poorly.

On the 24th, Mirae Asset Securities analyzed stock price increases by categorizing companies based on the number of consecutive earnings surprises. According to the results, from Q1 2012 to Q2 this year, the average annual stock price increase of all companies that recorded earnings surprises was 7.8%, surpassing the benchmark (average of all listed companies) of 5.0%. This indicates that surprise earnings had a positive impact on stock prices.

The group that achieved two consecutive surprise earnings had the best performance with a return of 12.8%. On the other hand, companies with three or more consecutive earnings surprises showed weaker stock price increases compared to those with two. Especially, companies that recorded four or more consecutive earnings surprises underperformed the benchmark returns.

In particular, among companies that recorded their first earnings surprise, those that also recorded an earnings surprise in the next quarter performed well. The average annual return of companies with a first earnings surprise improved significantly from 6.4% to +23.9%. The probability of outperforming the benchmark was recorded at 93%.

Researcher Yoo Myung-gan of Mirae Asset Securities said, "Among companies that recorded their first surprise, a selective approach considering the possibility of future performance improvement is necessary," adding, "In conclusion, companies or industries that have achieved two consecutive earnings surprises and have a long history of average earnings surprise occurrences may have an advantage."

He advised to pay attention to industries or companies that announced their first surprise earnings and have positive future prospects. Based on Q2 results this year, trading companies, capital goods, automobiles, and essential consumer goods (food and beverages) sectors achieved two consecutive earnings surprises. Additionally, the machinery sector recorded its first earnings surprise in Q2. Researcher Yoo said, "The machinery sector has favorable profit momentum in Q3, and the probability of consecutive surprises after the first earnings surprise is 45.2%, higher than the market average of 38%."

On the other hand, among sectors experiencing consecutive earnings shocks, utilities (maximum 14 times, average 7.7 times) recorded seven consecutive quarters of earnings shocks up to Q2 this year. Construction (maximum 8 times, average 5.0 times), media (maximum 13 times, average 5.5 times), and display (maximum 6 times, average 3.8 times) also recorded four consecutive quarters of earnings shocks. Considering the past consecutive earnings shock counts in these sectors, it is premature to expect a performance turnaround.

Researcher Yoo said, "When selecting companies with good profit momentum, caution is needed regarding earnings peak-out," adding, "If the earnings growth rate slows or if expectations for future performance are already high due to sustained earnings surprises, it is necessary to consider the continuity of earnings surprises."

In fact, the steel sector recorded eight consecutive quarters of earnings surprises from Q1 2020, but stock prices were positive during the first to third earnings surprise periods and showed weakness starting from the fourth earnings surprise in Q1 last year.

This content was produced with the assistance of AI translation services.