Earnings momentum strategy produces a 14% average annual return

Another simple example of how you can take advantage of the momentum anomaly, have a one-idea strategy and make money is with earnings momentum. At the heart of this strategy, which illustrates the effectiveness of the earnings momentum anomaly, is

the 4 quarter change in reported earnings per share (EPS). The EPS figure we’re looking at here is a 12 month sum. We want to do that to remove seasonality issues. So to calculate the 4Q percentage change, take the most recent 12 month sum of EPS and divide by the absolute value of the 12 month EPS sum 4 quarters prior. Since earnings can be negative, it’s best to use the absolute value of the denominator.

Using 4 week holding period returns, this strategy has produced a backtested annual average return of 14% from 2002-2010. Here are the annual details:

4 quarter earnings momentum S&P 500

2002 hottest celebrities -14% 22%

2003 70% 29%

2004 35% 11%

2005 6% 5%

2006 6% 16%

2007 2% 6%

2008 -54%

-37%

2009 53% 26%

2010 22% 15%

Avg 14% 5%

Furthermore, the compounded annual growth rate for this time period is 8% and the backtested results of $10,000 invested at the end of 2001 are below:

4 quarter EPS momentum is a strategy that was developed in Zacks’ Research Wizard. Please click here to learn how to test your current or new investment ideas to see if they are profitable before you trade!


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