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Earnings & Alpha:

Using Earnings
Analysis as an
Investment Tool

Presenter:

MITCH ZACKS
Portfolio Manager
Zacks Investment
Management

ETFS Zacks Earnings ETFs


Two Products
ETFS Zacks Earnings U.S. Large-Cap Index Fund (ZLRG) TER* 65 bps
ETFS Zacks Earnings U.S. Small-Cap Index Fund (ZSML) TER 65 bps

Zacks Research
One of the largest independent research companies, created in 1978
Specializes in and utilizes earnings revisions in its investment process

Zacks Earning Indices


Provide direct access to Zacks proprietary earnings models
Seek to outperform the major benchmarks, while seeking to maximize diversification &
liquidity
*TER Total Expense Ratio. BPS basis points

Zacks Indices
Focus on Zacks experience in earnings analysis
Zacks Rank (Quantitative) Ranks stocks based on earnings revisions
Zacks Quality (Qualitative) Analyzes the amount of non-cash component, or accruals*,
in a companys earnings

Seeks to maximize liquidity and diversification


Zacks earnings analysis
Quantitative model

Zacks
Rank

Qualitative model

Zacks Quality

Risk
management
Liquidity and
diversification
screens

Zacks
Earnings
Indices

*Accruals are accounts on a balance sheet that represent liabilities and non-cash-based assets used in accrual-based accounting. These accounts include, among many
others, accounts payable, accounts receivable, goodwill, future tax liability and future interest expense (Investopedia).

Concept of Earnings Revisions


Stocks have historically had a tendency to perform better with a lag following positive earnings
revisions
Average stock performance post forecast earnings revisions, 1994 - 2008

Buy-and-hold average return in percent

2.0%

Negative revisions
Positive revisions
1.0%

0.0%

-1.0%
0

10

20

30

40
50
Days after forecast revision

60

70

80

90

Source: ETF Securites. "The efficiency of earnings forecast pricing," 2014, Hsu & Jin. "Analysts Forecast Revisions and Market Price Formation," 2002, Gleason & Lee. Data
analysis periond: 01/02/1994 thru 12/31/2008.

Zacks Rank Capturing Earnings Revisions


The Strategy
Zacks Rank aims at assessing the potential impact of earnings revisions during the
earnings revision period
A proprietary earnings estimate revision model created by Zacks Investment Research

Unbiased, Systematic 2-Step Approach


-

Step 1: each stock is scored based upon 4 characteristics aiming at assessing


potential earning revisions and their strength

Step 2: each stock is rated from Strong Buy (1) to Strong Sell (5)

All brokerage firms are considered (over 200,000 earnings estimates)

Zacks Rank The Scoring


Zacks developed a model aiming at detecting as early as possible potential earnings
revisions during the earnings revision period, and try to assess the relative strength of
these revisions
The model is based on four characteristics:
Agreement: Degree that analysts revise earnings in the same direction
Magnitude: The bigger the revision, the larger the impact
Upside: The most recent forecast compared to the consensus
Surprise: The companys previous earning surprises can predict future ones
Each stock will get a score based on these 4 characteristics

Zacks Rank The Ranking


Stocks are normally distributed in 5 categories from Strong Buy (top 5% scores) to
Strong Sell (worst 5% scores)
Zacks ranking model is more objective than traditional broker recommendations
AVERAGE DISTRIBUTION OF BROKER RECOMMENDATIONS

DISTRIBUTION OF

ZACKS RANK MODEL

Source: Zacks
Investment
Research. The
ranking model is
determined
daily using the
same
distribution
percentages.

Zacks Quality The Accrual Anomaly


Research shows an inverse relationship between accruals and stock returns: the lower
the non-cash component of earnings, the higher the performance tends to be
Despite being well-documented, it is not fully taken advantage of by investors
Stocks ranked Buy or Hold by Zacks Rank with the lowest accruals are then included
Financial data as of December 31st
Revenues
Costs
Accounting Earnings
Accruals
Cash Earnings

$
$
$
$

Company A
1,000,000
800,000
200,000
200,000

$
$
$
$
$

Company B
1,000,000
800,000
200,000
1,000,000
(800,000)

Company A will be considered as having better earnings quality than Company B

Index Construction & Risk Mgmt


Stocks must have a minimum of $10-million average daily volume

Zacks Rank Strong Buy (1) stocks selected first


Zacks Quality If additional stocks are needed, Buy (2) or Hold (3) stocks with low
accruals are added
Each sector is equally weighted. Within each sector, every stock is equally weighted

Index is not
exposed to a
specific sector
or a specific
stock
Zacks distinguishes 16
specific sectors

Stocks selected
based on Zacks
Rank model and if
necessary by
Zacks Quality
model

ETFS Zacks Earnings Products - Summary


Investors can now access Zacks earnings analysis in simple and transparent ETFs
Both ETFs (ZLRG, ZSML) combine the Zacks Rank and Zacks Quality approach
An additional level of risk management is achieved by
- Equally weighting each sector
- Equally weighting each stock within each sector
Research has shown the indices that the ETFs track can achieve alpha-generation
compared to the major benchmarks.

Zacks Large Cap Objective: The Fund seeks to track the price and yield performance, before fees and expenses, of the Zacks Earnings Large-Cap U.S. Index.
Zacks Small Cap Objective: The Fund seeks to track the price and yield performance, before fees and expenses, of the Zacks Earnings Small-Cap U.S. Index.

Appendix

Why Earnings Revision Strategies Can Work


Seek to take advantage of four primary inefficiencies in the marketplace:

Franchise Bias:

Focus on publications of major brokers over accuracy

Implementation:

Investing models can be difficult to design and costly to implement

Conservatism:

Reluctance to incorporate positive news compared to negative news

Herding:

Focus on consensus rather than latest estimates

Zacks Rank - Agreement


Degree that analysts are revising earnings in
the same direction over the past 60 days
Stock X

All revisions
were positive
Score A

Stock Y

Stock Z

No trend
Score C

All revisions
were negative
Score E

Scores range from A to E:


- A: All estimate revisions were positive
- B: Most estimate revisions were positive
- C: No trend is evident
- D: Most estimate revisions were negative
- E: All estimate revisions were negative

Zacks Rank - Magnitude


Percentage change in the mean composite estimate over the recent past. Estimate changes for the
current and next fiscal year are included, with each weighting based on the time remaining in the
fiscal year. Magnitude scores range from 1 to 9, with 1 being the best. Scores of 1 to 4 are
positive, while scores of 6 to 9 are negative.

Zacks Rank - Upside


Extent to which the most recent estimates differ from the consensus. Upside is designed to show the
beginning of an upward or downward trend. Scores range from 1 to 9, with 1 being the best.
Scores of 1 to 4 are positive, while scores of 6 to 9 are negative.

Latest estimates are higher than the


consensus.
Positive sign
Expected score between 1 and 4

Latest estimates are in line with the


consensus.
No specific sign
Expected score around 5

Latest estimates are below the consensus.


Negative sign
Expected score between 6 and 9

Zacks Rank - Surprise


Extent that the last reported quarterly EPS outperformed analyst mean estimates. Scores range from
1 to 9, with 1 being the best. Scores of 1 to 4 are positive, while scores of 6 to 9 are negative.

A positive earnings surprise is likely to lead to


estimates revisions. There is also a higher chance
for earning surprise to reoccur over the next period.
=> Expected score between 1 and 4

Missing the earnings estimate will likely lead to a


downgrade of the next estimates. There is also an
increased risk that the firm could miss the next estimate.
=> Expected score between 6 and 9

Zacks Quality - Example


Earnings quality is determined by comparing the operating income (from profit & loss) and the
operating cash flows (from the cash flow statement). Accruals, or non-cash components, are then
expressed as a percentage of total assets. Results are adjusted to recognize industry specifications
and facilitate comparison across sectors.

Important Information
An investor should consider the investment objectives, risks, charges and expenses of the ETF carefully before investing. To obtain a prospectus containing this and other
important information, call 1-212-918-4954 or 844-ETFS-Buy (844-383-7289) or visit www.etfsecurities.com. Read the prospectus carefully before investing.

Fund Risk There are risks associated with investing including possible loss of principal. The prices of the securities in which the Fund invests may decline for a number of reasons, including
in response to economic developments and perceptions about the creditworthiness of individual issuers. The Fund does not attempt to outperform its Index or take defensive positions in
declining markets. Past performance does not guarantee future results. There can be no assurance that the Funds investment objective will be achieved. Please read the Funds prospectus
for specific details regarding the Funds risk profile.

The Fund is not sponsored, endorsed, sold or promoted by Zacks Investment Research, Inc. (Licensor). Licensor makes no representation or warranty, express or implied, regarding the
advisability of investing in securities generally or in the Fund particularly or the ability of the Zacks Earnings Large-Cap U.S. Index (Index) and the Zacks Earnings Small-Cap U.S. Index to
track general market performance. Licensors only relationship to ETF Securities Limited (Licensee) is the licensing of the Index that is determined, composed and calculated by Licensor
without regard to the Licensee or the Fund. Licensor has no obligation to take the needs of the Licensee or the owners of the Fund into consideration in determining, composing or calculating
the Index. Licensor shall not be liable to any person for any error in the Index nor shall it be under any obligation to advise any person of any error therein.
The Fund is a new product and any performance prior to the date of index inception is hypothetical.
The inception date for Zacks Earnings Large-Cap U.S. Index and the Zacks Earnings Small-Cap U.S. Index is 10/01/14.

Indices are unmanaged and one cannot invest directly in an index.


ALPS is not affiliated with ETF Securities or with Zacks Investment Research.
ALPS Distributors, Inc. is the distributor for the ETFS Trust.
Investors buy and sell shares on a secondary market (i.e. not directly from Trust). Only market makers or authorized participants may trade directly with the funds, typically in blocks of 50
thousand to 100 thousand shares.

Important Information
The Russell 1000 Index is a capitalization weighted index that measures the performance of the 1,000 largest U.S. companies based on total market capitalization. The S&P 500 Index is a
capitalization-weighted index of 500 stocks selected by the Standard & Poors Index Committee designed to represent the performance of the leading industries in the U.S. economy.]
The Russell 2000 Index is a capitalization weighted index that measures the small cap segment of the U.S. equity universe, selecting stocks ranked 1001-3000 by market capitalization from
the Russell 3000 Index. The S&P 600 Index is a capitalization weighted index of 600 stocks selected by the Standard & Poors Index Committee designed to represent the performance of the
small-cap segment of the market. Data source: ETF Securities, Bloomberg, Zacks. ETF Securities Funds are distributed by ALPS Distributors, Inc.
For institutional use only.

ETFS 000670 12/31/2015

Thank You.
Questions?

Earnings & Alpha:

Using Earnings
Analysis as an
Investment Tool

Presenter:

MITCH ZACKS
Portfolio Manager
Zacks Investment
Management