Behavioural biases affecting the way analysts change their earnings forecasts and stock recommendations can be exploited to unearth potential investment opportunities.

The key idea is to find discrepancies between what analysts are doing to their earnings forecasts and what they are saying through their recommendations. We start by identifying the least loved UK stocks as seen through the lens of analyst buy recommendations. You might be thinking, why not screen for the most popular stocks?

Well, the sad fact is, most studies show analyst recommendations by themselves are of little value in terms predicting future stock performance. However, changes in recommendations can be powerful signals.

By drilling down on the least favoured companies among analysts, we can be reasonably confident that sentiment towards these firms is already relatively depressed, and expectations are low. Next, we introduce the idea of earnings revisions. These are simply the changes analysts make to their forecasts following company results and trading updates.

POSITIVE EARNINGS REVISIONS HELP COMPANIES OUTPERFORM 

Many studies have shown that stocks with persistent positive earnings revisions tend to outperform the market. Companies which are receiving positive earnings revisions are more likely to see revisions in the same direction and these cycles can last many months.

To understand why EPS (earnings per share) revisions move in cycles we need to understand how analysts respond to new information and the action of other analysts. In a perfect world analysts are rational and informed about the companies they cover, undertaking independent research and gathering information to conclude a view and weave it into a persuasive investment narrative.

In practice analysts know in advance of doing research where the consensus earnings forecast sits and what his or her peers think of a particular company. This brings ‘group-think’ and ‘herding’ into play. Research shows analysts tend to take ‘baby steps’ when making revisions, leaving room for further moves in the same direction. This suggests not all good news is immediately priced into earnings forecasts. (Note, this is not true for bad news).

This dynamic explains why earnings revisions move in cycles, lasting many months and why they are a key driver of share price outperformance. Outperforming stocks are more likely to see buy ratings slapped on them as analysts do not want to appear to be out of sync with the herd, creating a virtuous circle.

Group-think means that, at some point, after one analyst is brave enough to ‘break cover’ and move to a buy recommendation, others are more likely to follow suit.

In summary, the opportunity here is to spot companies where analysts are sitting on the fence with a ‘hold or ‘underperform’ rating while simultaneously nudging up their earnings forecasts.

The key message is, watch what analysts are doing, not what they are saying.

PUTTING IT INTO PRACTICE

Using Stockopedia software, we screened for stocks where less than 10% of the analysts covering them (with a coverage of at least three) have a buy recommendation.

We then analysed the change in consensus EPS revisions over the prior three-months to identify discrepancies between what analysts are saying (buy, hold etc) and what they are doing to their earnings forecasts.

For context, over the last three months earnings revisions across the UK market have been roughly flat, which means, those companies with a positive revision are seeing better than average upward revisions.

Fund management group Jupiter Fund Management (JUP) has seen analysts ratchet-up their 2025 EPS estimates by a whopping 43% to 9.4p since early May when downward EPS revisions troughed at around 6.5p.

This coincided with the group announcing a further £15 million of cost savings and, importantly, revealing that fund outflows had virtually ground to a halt, raising the prospect of fund inflows.

Jupiter confirmed this change in fortunes at the 25 July first-half results when the group reported net positive inflows in second quarter. The same trend appears to have happened across the sector with other fund groups reporting positive or less negative fund flows in recent weeks.

Beady-eyed investors who spotted the uptick in earnings revisions in early May would have been rewarded with a 63% rally in Jupiter’s shares.

Telecommunications and mobile money services provider Airtel Africa (AAF) operating across Nigeria and East Africa gets no love from the analyst community.

Not even one brave sole believes the shares are a ‘buy’, yet as a group analysts have quietly revised up their 2026 EPS estimates by 17% over the last quarter.

The shares are up an impressive 80% so far in 2025, making them one of the best performing in the FTSE 100 index, demonstrating once again the value in keeping close tabs on what analysts are doing rather than what they are saying.

A REVERSAL IN THE TREND FOR BP?

There is almost universal disinterest in energy giant BP (BP.) from analysts with just two out of 22 sticking a buy rating on the shares. That might have something to do with the fact that 2025 EPS estimates have been slashed by more than half over the last 18-months.

That cycle is looking long in the tooth, so it is interesting that the shares reacted positively to news this week (4 August) of a new oil discovery in Brazil, the oil major’s biggest in a quarter of a century.

The company also revealed better than expected quarterly results the following day, so it may be worth keeping a close eye on those earnings revisions for early signs of a reversal in trend. 

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