A New Look at Value Line Earnings and Stock Price Forecasts

Download or read book A New Look at Value Line Earnings and Stock Price Forecasts written by Philip L. Baird and published by . This book was released on 2013 with total page 44 pages. Available in PDF, EPUB and Kindle. Book excerpt: This research investigates Value Line short-horizon and long-horizon earnings and stock price forecasts. From 1987-1998, Value Line analysts issued optimistic quarterly and annual EPS forecasts. This is consistent with prior research showing that analysts generally issued upwardly biased earnings forecasts. From 1999-2008, however, the optimistic bias in Value Line forecasts disappeared. Value Line's long-horizon earnings forecasts were too optimistic, while its long-horizon target price forecasts were slightly conservative. Like analysts generally, Value Line analysts were systematically optimistic with respect to prior-quarter change in earnings, and they systematically underreacted to negative prior-quarter earnings surprises. From 1999-2008, Value Line analysts optimally incorporated information from prior forecast errors for all but the bottom 25% of firms in terms of quarterly earnings surprise. Value Line forecasts appear to hold unique potential for use in equity valuation models, allowing researchers to avoid the distorting assumptions typically required in prior approaches to valuation modeling. The source of the impressive performance of Value Line's Timeliness rank appears to stem from bias in analysts' forecasts. Value Line analysts were consistently more conservative (less aggressive) in their forecasts for rank 1 stocks than in their forecasts for rank 5 stocks.