 # Momentum Valuation Indicators

Momentum indicators relate to price or a fundamental, such as earnings, to the time series of their past values or the fundamental’s expected value.

There are three major momentum indicators:

• Earnings surprise.
• Standardized unexpected earnings.
• Relative strength.

## Earnings Surprise/Unexpected Earnings

Unexpected earnings (also called earnings surprise) are the difference between reported earnings and expected earnings.

$$\text{UE}_{\text{t}}=\text{EPS}_{\text{t}}-\text{E}(\text{EPS}_{\text{t}})$$

Where:

$$\text{UE}_{\text{t}}=$$ Unexpected earnings for quarter $$t$$.

$$\text{EPS}_{\text{t}}=$$ Reported earnings per share for quarter $$t$$.

$$\text{E}(\text{EPS}_{\text{t}})=$$ Expected EPS for the quarter.

A stock with reported quarterly earnings of $2.05 and expected earnings of$2.00 would be considered to have a positive earnings surprise of $0.05. The percent earnings surprise would be $$\frac{0.05}{2.00}=0.025\ \text{or}\ 2.5\%$$. ## Standardized Unexpected Earnings (SUE) SUE scales unexpected earnings by a measure of the size of historical forecast errors or surprises. The underlying principle is that the lower the historical size of the forecast error, the more meaningful the given forecast error. It is calculated as: $$\text{SUE}_{\text{t}}=\frac{\text{EPS}_{t}-\text{E}(\text{EPS}_{\text{t}})}{\sigma[\text{EPS}_{t}-\text{E}(\text{EPS}_{\text{t}})]}$$ Where: $$\text{EPS}_{t}=$$ Actual EPS at time $$t$$. $$\text{E}(\text{EPS}_{\text{t}})=$$ Expected EPS at time $$t$$. $$\sigma[\text{EPS}_{t}-\text{E}(\text{EPS}_{\text{t}})]=$$ Standard deviation of $$\text{EPS}_{t}-\text{E}(\text{EPS}_{\text{t}})$$. ## Relative-Strength Indicators They compare a stock’s performance during a period with its past performance or with the performance of a group of stocks. This indicator is often scaled to 1 in the beginning period for ease of interpretation. If the stock outperforms the index, the relative strength indicator will be greater than 1. # Question Suppose a stock has reported quarterly earnings of$8.35 and expected earnings of \$7.90. The earnings surprise would closest to:

1. 0.45.
2. -0.45.
3. 8.35.

### Solution

\begin{align*}\text{UE}_{\text{t}}&=\text{EPS}_{\text{t}}-\text{E}(\text{EPS}_{\text{t}})\\&=8.35-7.90\\&=0.45\end{align*}

Reading 25: Market-Based Valuation: Price and Enterprise Value Multiples

LOS 25 (p) Describe momentum indicators and their use in valuation.

Shop CFA® Exam Prep

Offered by AnalystPrep Level I
Level II
Level III
All Three Levels
Featured Shop FRM® Exam Prep FRM Part I
FRM Part II
FRM Part I & Part II
Learn with Us

Subscribe to our newsletter and keep up with the latest and greatest tips for success
Shop Actuarial Exams Prep Exam P (Probability)
Exam FM (Financial Mathematics)
Exams P & FM GMAT® Complete Course Daniel Glyn
2021-03-24
I have finished my FRM1 thanks to AnalystPrep. And now using AnalystPrep for my FRM2 preparation. Professor Forjan is brilliant. He gives such good explanations and analogies. And more than anything makes learning fun. A big thank you to Analystprep and Professor Forjan. 5 stars all the way! michael walshe
2021-03-18
Professor James' videos are excellent for understanding the underlying theories behind financial engineering / financial analysis. The AnalystPrep videos were better than any of the others that I searched through on YouTube for providing a clear explanation of some concepts, such as Portfolio theory, CAPM, and Arbitrage Pricing theory. Watching these cleared up many of the unclarities I had in my head. Highly recommended. Nyka Smith
2021-02-18
Every concept is very well explained by Nilay Arun. kudos to you man! 2021-02-13   