Six shares where City brokers predict a profits boom
29th September 2022 12:09
by Ben Hobson from interactive investor
It can take time for share prices to reflect more optimistic expectations following earnings upgrades. Stock screen expert Ben Hobson finds six shares that might not have factored this in.
Economic turmoil has dragged on equity prices this year but not all shares are suffering. The earnings outlook for a number of companies has actually improved in recent months, with brokers increasing their financial forecasts as a result.
For investors looking for ideas in volatile conditions, large earnings forecast upgrades can be a pointer to where analysts see signs of attractive upside.
The reasons for this are varied. It could be that firms are either performing better than expected, recovering from setbacks or just happen to be in hot industry sectors.
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Analyst forecasts sometimes attract scepticism. But academic studies show that big consensus forecast upgrades can be useful because the market is often slow to re-price shares on the back of them.
This lag, which is sometimes called ‘post earnings announcement drift’ is a well-known phenomenon. It’s caused in part by investors anchoring on previous price levels and being slow to adjust to the brighter earnings outlook.
Forecasts under pressure on economic worries
In recent times, analysts have been busily updating their company earnings forecasts in the aftermath of the Covid pandemic. But rising inflation and input prices are forcing another rethink. Many forecasts have been revised down rather than up, but there are positive upgrades out there.
Here are some of the most recent large forecast upgrades - focusing on expectations for corporate results in the next financial year:
Name | Sector | Market Cap £m | 2 Year Earnings Per Share Forecast Change 3 Months % | 1-Year Relative Price Strength % | PE Ratio |
Metals & Mining | 115,797.6 | 125.5 | 24.27 | 7.3 | |
Media | 979.0 | 56.0 | 16.73 | 23.1 | |
Oil & Gas | 1,013.3 | 52.3 | 69.04 | 2.7 | |
Oil & Gas | 1,083.3 | 40.6 | 10.68 | 6.2 | |
Insurance | 3,508.7 | 31.7 | 51.68 | 15.0 | |
Oil & Gas | 81,442.3 | 31.4 | 29.96 | 4.3 |
A clear trend here is that commodities and energy industries have attracted the most significant upgrades over the past three months. Despite pulling back from recent extreme highs, oil and gas prices remain relatively pricey. That is partly as a result of supply shocks caused by the war in Ukraine.
On the back of this, Serica Energy (LSE:SQZ), Diversified Energy Co (LSE:DEC) and BP (LSE:BP.) have all seen big earnings forecast upgrades for the next year. North Sea producer Serica saw the biggest upgrade, with a 52.3% upward change to forecasts.
Importantly, earnings across the oil and gas industry are currently expected to pull back after this exceptional period, although in many cases, longer term forecasts remain elevated above longer-term earning trends.
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Uncertainty about shifts in oil and gas prices are likely to be part of the reason why these shares remain relatively cheaply priced based on price-to-earnings, despite such big profits.
Other shares enjoying big upgrades over the past three months include mining giant BHP Group Ltd (LSE:BHP). Here, analysts predict a brighter outlook on the back of renewed demand from China where Covid lockdowns are anticipated to lift.
At the time, analysts at Jefferies were reported as saying: “While macro risks are clearly elevated and mining shares should be volatile, the sector is undervalued and poised to outperform as China recovers.”
Upgrades were also triggered at insurance group Beazley (LSE:BEZ), which came through with better than expected results this summer, helped by a boost in its cyber risks business. Promotional marketing firm 4imprint Group (LSE:FOUR) remains in the top six after a half-year update in which it said it was on course to smash its own guidance for the full year.
Ben Hobson is a freelance contributor and not a direct employee of interactive investor.
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