Subject: Re: Pod shops, factor investing, forward EPS revisions
A bit late to the thread, but thanks for posting that link. Quite a good read.

A screen strategy springs to mind: don't look for positive earnings revisions per se. Look instead for the transition from a trend of negative earnings revisions to positive ones, with a layer for good longer term prospects.

The idea would be to try to capture the short-term-hiccup-long-term-great firms just as their stretch of being out of fashion is ending and turning around. Then you are holding during a stretch that BOTH factors are going for you: good prospects and probable undervaluation from being oversold, and current earnings revision momentum. If you held till old fashioned price momentum fell off (while earnings revision momentum still good), you could ride it all the way from underloved to overvalued, then bail.

As a bonus, this would probably be a longer average hold than a pure earnings revision screen.

I'd say this is a very good stock picking investing strategy, but I doubt that it's practical as a mechanical screening strategy. We're looking here at something that requires a dive into a company's business cycle, which may happen on a different time scale for different companies. Why was it down? Have its business prospects turned a corner? Does it have potential for continuing to surprise to the upside? Those are all questions that fundamental company analysts try all the time to address. Many people do this successfully, I believe. But it involves hard work as opposed to mechanical screening.

Elan