Tracking changes to expected sales numbers is one of the best ways to pick stocks, according to new research from Goldman Sachs.
Analysts at the bank set out to see if changes to revenue projections by analysts were a leading indicator of stock performance. The idea was to find out if this measurement, which the analysts referred to as the revisions factor, could be used in the same way as traditional factors such as momentum and value and provide an edge to investors.
To test this, Goldman sorted stocks based on recent changes to consensus revenue projections in FactSet. Analysts then created a hypothetical portfolio that was long the top 20% of stocks in each coverage area and short on the bottom 20%. This was rebalanced on a weekly basis, going back to April 2011.
The revisions portfolio beat similar portfolios based on more traditional factors, notching an annualized gain of 7%. The return in 2019 was 6%, with positive results coming from a combination of the long positions rising and the shorted stocks falling.