A year ago, we debuted a different type of stock screen. Loosely based on a 2023 paper by Tobias Kalsbach and Steffen Windmüller of the Technical University of Munich, it sought to exploit a phenomenon familiar to many investors: the earnings drift.
This effect is named for the tendency for markets to assimilate earnings-impacting news more slowly than the efficient markets hypothesis assumes. Some of this may seem like semantics. But whether investors fail to accurately ‘price in’ news as it arrives, or whether positive (or negative) news tends to serve as a momentum signal for further positive (or negative) news, something is at work here.
According to the German academics’ findings, investors’ underreaction to positive news is most prevalent when it involves stocks trading near their 52-week highs.