Can historical earnings predict prices?

20 Oct 2022 , 11:38 AM

Analysts at IIFL Capital Services took BSE200 as their sample, for each year between 2006 and 2022. They looked at each stock’s trailing 2-year EPS CAGR, and classified the stocks into 4 quartiles. They then measured each quartile’s performance in the next 1-year period, and concatenated returns using an annual portfolio refresh. They also redid the analysis by excluding commodity producers, as inflections in commodity cycles should have more immediate impact on stock prices of commodity producers.
Key findings over the 16-year period:

• Q1 portfolios outperformed Nifty 50 by 280 basis points equal-weighted and 90 basis points Mcap-weighted.
• Q4 portfolios underperformed by 160 basis points equal-weighted and 490 basis points Mcap-weighted.
• Ex-commodities, Q1 portfolios outperformed by 380 basis points equal-weighted and 270 basis points Mcap-weighted.
• Ex-commodities, Q4 portfolios underperformed by 130 basis points equal-weighted and 200 basis points Mcap-weighted.
• Further, a long-short Q1 versus Q4 portfolio (again, annual refresh) delivers a performance of 3.7% to 5.6% with variations being:a) Cum and ex commodities, b) Equal-weighted and Mcap-weighted portfolios.
• These performances were quite consistent, except in periods of severe market dislocations, like 2008, 2020 and 2021.