An Evolution in Earnings Analysis…Again!

"EidoSearch is the culmination of everything I’ve been interested in: organization of information, efficiency gains through presentation of data and forecasting capability"

-Jeff Parker, founder of First Call and StreetEvents and former Chairman and CEO of Thomson Financial - Institutional Investor, July 8, 2014

If you’re unfamiliar with the EidoSearch story, here is the quick and dirty. Dr. Steven Zhang and David Kedmey started the business in 2008 after completing their MBA’s at the University of Chicago Booth School of business. Dr. Zhang had a 20 year career in the field of signal and information processing, including holding several U.S. patents, and had previously applied his algorithms and expertise to the Neurosciences, The Human Genome Project and NASA.

While at Booth, they both had taken a class involving a case study on a company called Technical Data Corp which was founded by Jeff Parker in 1980. This was one of many successful FinTech businesses Jeff started over 30 years including First Call and CCBN StreetEvents.

After 4 years of development of the EidoSearch algorithms and technology, Dr. Zhang and David were ready to introduce the World’s first numerical search engine to the market and felt it was ideally suited for Finance. They met Jeff, who they had remembered from the case study at Booth, and Jeff immediately saw the promise for this cutting edge predictive analytics technology in Finance. He joined as Chairman in 2013 to help productize, and EidoSearch now provides solutions to many of the largest asset managers and hedge funds in the world.

Most of our clients are fundamentally oriented long only and long/short investors, and what we have heard repeatedly from them is the desire to better incorporate statistics and probabilities in their investment process. The one area they have identified that is less driven by their fundamental thesis and is more subjective is around decision points. Questions like: Is this a good entry point? Should we lock in some gains after this run up? We are filling this market need by analyzing patterns in securities and forecasting probable returns and volatility over short and long term horizons.

We continue to get feedback on where we can apply our advanced analytics to further impact the investment process. By and far, the most requested enhancement has been for earnings specific analytics. Quarterly results provide a key barometer for how a portfolio managers companies are performing and therefore they spend a significant amount of time preparing for earnings announcements and adjusting portfolios after the release.

This was a natural challenge for us to tackle. Jeff built the consensus earnings estimates business with First Call, and changed how investors access earnings information in a more efficient and timely fashion with StreetEvents.

We are excited to introduce Earnings Based Analytics capabilities to the investment community, and we believe this will once again change how investors prepare for and react to earnings results. Here’s how it works. EidoSearch is now able to analyze patterns and trends specific to the earnings event. So, let’s say a company just reported earnings before market open and the stock jumps 11% on the news. We find the most similar comps from history, i.e. how the stock traded into earnings with a similar extreme move up one day after the news, to capture statistics and probabilities on the typical response by the market in the next week, month, etc.

Questions we help answer through objective statistics pre-earnings release:

· Are your positions too small or big heading into earnings?
· Where are the best opportunities in your portfolio to trade around earnings? Where should you manage risk?
· Is there information in the fact that a stock is trading down or trading up prior to its earnings announcement?

Post-earnings release:

· After an extreme move up or down following an earnings release, is it a good time to build a larger position or trim your position?
· Does a stocks trajectory going into earnings impact the amount of the move post earnings release?
· On an earnings miss or bad results, how long does this stock typically languish?

And you don’t have to keep plugging in tickers to pull out the information either. For clients, our tech runs through a billion patterns every night to alert them to the stocks in their watch list that have upcoming or recent earnings results with strong positive or negative projections.

For this week’s market call, we’ve provided an example for Micron Technology (MU). Last week on March 31st, two days ahead of their earnings release on April 2nd, we provided the projection detailed below. We took the 3 month trend in their price going into earnings, and looked through 10 years of history in their peer group (all Semiconductors) to find the most similar comps. Here’s your gauge:

· We found 19 statistically similar matches in Semi’s
· In the next 1 month the stock is up 17 of 19 times (89.5% of the time)
· The average 1 month return is 8.6%

There are primary, fundamental reasons why the stock has been trading down; Softness in the segment, build-up of inventories, etc. But, we are now providing meaningful statistics to answer the above questions. When a Semi trades down like this into earnings, it’s pretty rare that the beating continues.

Have a great week!