Ahead of the European earnings season, analyst revisions have proven to be a positive catalyst on the upside and attracted the interest of short sellers following downgrades.

• The shares which have seen the best analyst revisions have outperformed the rest of the market by over 10% over the last 12 months
• UK home builders shine along with the rest of the real estate sector
• Short sellers have targeted shares which have seen the worst analyst revisions, led by banks

Three months on from the start of the year and in the wake of the final earnings season of 2013, we check in on analyst sentiment using Markit Research Signals’ 3 Month Change in FY1 EPS Forecast factor (see appendix for description) across Europe

Analyst revision driving outperformance

Analysts have driven share prices higher over the last 12 months with the shares that have witnessed the best medium term analyst revisions having outperformed their peers over the last year.

This outperformance has cumulated in a 10.8% increase over the 12 months leading up to the first of April, with the share seeing most positive analyst revisions having beaten the universe average for 10 of these months.

Over the most recent earnings season, the factor has seen the shares in the best ranked decile group outperform the rest of the rest of the universe by 2.2%. This is over twice the outperformance seen in the third quarter earnings season of less than 1%.

Consumer high flyers

The sector with the highest proportion of constituents in the best performing 10% of shares is consumer electronic.

The sector is led by French firm, Technicolor which analysts are expecting to return to profitability in the coming fiscal year after reporting an 11 euro cent loss in February. Technicolor shares are up by over a third since the start of the year.

Another name in the computing space seeing good analyst revisions is, Logitech which surprised analyst in its latest earning release, prompting a sharp upwards revision for the coming year. Interestingly, shorts have rebounded somewhat since the company announced its earnings.

Homebuilders looking strong

Homebuilder is other sectors with over a third of its constituents having seen the best analyst revisions. This equates to seven of its 11 stocks in the best scoring group.

UK based firms have seen their prospects surge after the UK government extended a help to buy scheme in order to ensure a greater UK home ownership. Analysts have scrambled to revise their estimates with six of the seven UK homebuilders now in the group seeing the best revisions, with laggard Berkeley group in the second best group. The company scoring the highest in the sector is Bellway.

Shorts gather on the other side

On the other side of the coin, short sellers have increased their positions in shares which have seen the worst analyst revisions.

The average short interest in the worst ranked group currently stands at 3.6% of total shares outstanding on loan. This has increased 37% since the start of the year.

Oil platform operator, Transocean tops the list of companies which have seen the largest surge in demand to borrow, with over 13% of its shares on loan.

On a sector basis banks are the most prominently represented in the group seeing the worst analyst revisions with 13 companies.

However, demand to borrow banks in this group has remained relatively flat since the start of the year, with the exception of Italian listed, Banco Popolare.

The stock has seen demand to borrow more than double to 9% of shares outstanding as analysts have halved their profit expectations for the coming year for in the last three months.

Appendix: Factor description

This 3 Month Change in FY1 EPS Forecast factor measures the change in current fiscal year earnings estimates from 3 months ago to current earnings estimates for the same fiscal period. It is a good indicator to isolate companies with changing earnings expectations and those that have provided interim earnings surprises. Shares are ranked from 1 to 100 with companies seeing the best analyst revision receiving a low score.

The universe observed is the Markit Developed Europe Universe which has over 1200 constituents and represents over 90% of the European market cap.