4Q11 Earnings Surprise and Signal Report Vol 1

02/06/12 -

Top 4Q11 Small-Cap "Must Knows" from this week's report:

• Reporting companies are posting admirable operating margin.  With approx. 20% of R2000 companies reported, operating leverage in 4Q11 is quite strong as 5% y/y sales growth is translating to +13% y/y earnings growth.  We recognize the higher quality small-caps report earlier, and wait to see if remaining companies can also post mid-teens earnings growth on mid-single-digit sales growth.
• Earnings surprise is down from 3Q11.  Current +4% earnings surprise is acceptable but down from +6% posted in 3Q11.  We believe this is normal as we move farther away from the 3Q09 earnings trough, and we expect surprise to be +2% to +4% going forward.
• Cyclicals lead the way.  Energy (+19%), Industrials (+10%) and Materials (+13%) are not only posting the strongest earnings surprise, but they are also posting the strongest y/y earnings growth.  Materials’ +34% y/y earnings growth is strongest so far, while Energy (+30% y/y) and Industrials (+27% y/y) are not too far behind. We note only 3 Energy companies have reported that are included in this report.

And much, much more sector, industry and company specific details.  Also,

• NEW TO THE ESS:  We have changed our relative price impact to reflect a stock’s performance relative to its industry group’s performance.  Before it was relative to the R2000’s performance.  We recognize certain sectors/industries can be outperforming as a whole, allowing their stocks to outfperform or underperform the index regardless of what they report.  To better reflect a stock’s relative impact due to its earnings report, we compare its performance relative to the industry group.  Our detailed company tables still show both a stock’s price impact relative to its industry group and relative to the R2000.