Projected Earnings Accuracy and the Profitability of Stock Recommendations

Analysts providing more accurate earnings forecasts also issue moreprofitable recommendations. We demonstrate how investors can profit fromthis contemporaneous link by differentiating between “able” and “lucky”analysts. In line with previous studies, we find that past track records aloneare not sufficient to identify profitable recommendations. Only skilledanalysts working in a superior environment provide consistently profitablerecommendations. The overall profitability of their recommendations is notdriven by a post-announcement drift effect. We find that an implementable,i.e. look-ahead bias free, trading strategy based on the projected – rather thanpast – earnings accuracy yields substantial excess returns.