Many investment experts believe there is a strong correlation between a change in earnings forecasts and a company’s share price.
Analysts raising their expectations for future earnings often results in a higher share price (and vice versa) for the recipient company, hence why investors like to know which stocks are in this situation.
Investment bank Canaccord Genuity has this week published a list of stocks which have seen the largest upgrades and downgrades over the past three months, relating to their expected earnings over the next year.
We will now take a look at four of the stocks on the list. They are good examples of how good or bad news has a major impact on the share price.
STOCKS WITH LARGE UPGRADES
Video game creator Frontier Developments (FDEV: AIM) has had a stunning year, attracting investment from Chinese entertainment titan Tencent amid plans to develop a game based on the popular Jurassic World movie franchise.
Frontier is expected to launch Jurassic World Evolution next summer. Broker FinnCap believes it has the potential to sell more than 1m units.
Analysts are clearly excited about Frontier’s future as the stock has seen its forward earnings upgraded by 2,610% over the past three months, according to Canaccord’s data.
The shares are already up by 277% year to date, suggesting that investors not already in the stock may have missed the boat with the recent earnings upgrades.
The second most upgraded stock is Cairn Energy (CNE), which struggled earlier in 2017 amid lower oil prices and a tax dispute in India.
Canaccord says the oil and gas explorer’s earnings forecasts for the next 12 months have been upgraded by 538% over the last quarter. Cairn’s share price has increased by 19% over the same three month period.
The company’s prospects improved in the summer thanks to its Kraken heavy oil field in the North Sea delivering first oil in June.
The oil field is expected to yield 15,000 barrels of oil per day (bopd) once it hits peak output of 50,000 bopd.
STOCKS WITH LARGE DOWNGRADES
Cadmium-free quantum dots (CFQD) developer Nanoco’s (NANO) commercialisation plans are taking longer to achieve than expected, causing analysts to downgrade its earnings forecasts by 1,940% over the past three months.
The percentage downgrade reflects how Nanoco is now expected to be loss making in its current financial year versus previous forecasts for a profit. Its share price has fallen by 32% over the past three months.
Another company subject to a large earnings downgrade is tool hire outfit HSS Hire (HSS), which warned in August that a recovery in sales would be ‘materially slower’ than expected. Its market value has halved over the past three months.
It’s been a tough year for HSS Hire after it extended its restructuring programme into the first quarter of 2017 and its CEO John Gill resigned after eight years.
There seems to be little optimism that the restructuring will reap the necessary benefits reflected in the 130% total downgrade by analysts over the past quarter.
