Sales Dispersion: A Robust Factor to Consider to Achieve Alpha

Abstract

How the divergence among investor opinions affects stock performance has been discussed in academia and industry for a long time without a clear conclusion. This research hypothesizes that companies with lower sales forecast dispersion can more accurately and efficiently plan strategies to optimize production, inventory control, and distribution channels, thereby minimizing waste and overall expenses. This, in turn, will increase long-term profitability. Using portfolio sorting analysis, this article documents that the lower the analyst sales dispersion, the bigger the company’s forecasting edge and the higher the probability of future stock outperformance per level of risk (alpha). Because sales is a more direct demand-driven evaluation measure than earnings and sales forecasts can be utilized to evaluate all companies, sales dispersion is more robust in predicting future stock performance than earnings dispersion.

TOPICS: Performance measurement, analysis of individual factors/risk premia, wealth management

Key Findings

• ▪ Revenue dispersion is a better factor than earnings dispersion to forecast future company and stock price performance.

• ▪ Revenue dispersion is robust enough to use as a factor to achieve alpha.

• ▪ Revenue dispersion is significantly more robust during periods of high market noise.