Stock Selection Models | Earnings and Sales Momentum
Earnings Momentum was introduced in April 1996. An improved version of our original earnings trend analysis, Earnings Momentum makes an additional adjustment for the volatility of the earnings. Earnings Momentum adjusts the standard earnings trend by its standard error, a measure of how well the curve fits the earnings series. Earnings Momentum has improved performance over the original earnings trend analysis in the top and bottom deciles.
Introduced in July 1974, Ford's Earnings Trend Analysis measures the acceleration or deceleration in the growth of operating earnings per share for the latest quarter, the previous three quarters, and an estimate for the next quarter. Rather than actual quarterly earnings figures, 12-month earnings ending with each quarter are used, to eliminate seasonal fluctuations. A curve is fitted to the five earnings figures, and a second derivative is calculated to measure the curvature (acceleration or deceleration) of the curve.
Relative Earnings Trend
Wide swings in Ford’s Earnings Trend variable can occur in low quality companies with high earnings variability. Ford’s Relative Earnings Trend overcomes the problem of these wide swings by relating each company’s earnings trend to the historical magnitude of its earnings trend. A company’s Relative Earnings Trend is computed by dividing its Earnings Trend by the standard deviation of its Earnings Trend over the past 60 months.
Introduced in June 1996, Ford's Sales Momentum measures the acceleration or deceleration in the growth of sales using the same calculation as Earnings Momentum. The second derivative of a curve fit to the trailing 12-month sales ending each of the past five quarters is calculated to measure the acceleration or deceleration of the growth rate. The second derivative is then adjusted by how well the curve fits the sales series (standard error) to compensate for companies with erratic sales.