It happens four times a year. Investors, analysts, financial media, and traders wait with bated breath every quarter for companies to trot out their top executive team to report their earnings. So much is at stake to see if they can meet, beat, or miss, the prognosticators’ estimates.
Amazingly (note sarcasm), most companies are able to beat earnings estimates by a penny or so. That means the analysts that put out these estimates are as good as Vegas oddsmakers and/or companies are able to massage their numbers in such a way to make everyone happy with the results. There’s definitely a little of both. But there is also some stuff going on that we don’t normally hear about, such as major shareholders, like hedge funds and institutions, that call up the analysts all the time to chew them out if they have a downgrade or low earnings estimates on the stock they own. Much of the time, this pressure works and they change their analysis to be more favorable to the shareholders. Why do analysts cave to the pressure? Because these analysts get paid by selling their research and the people who buy their research are the big stockholders: hedge funds, pension funds, and other institutional buyers. That’s why I don’t give analysts’ recommendations much weight when researching potential investments.
So, the flexible accounting rules and the chummy relationships between shareholders and analysts make it pretty easy for a company to meet or beat earnings estimates each quarter. It’s when a company misses estimates to the downside, by say more than a few pennies, that you should take notice.
Having said that, it’s important to note that this information means different things to different kinds of investors. As long-term investors, it’s best to avoid the quarterly earnings game if you’ve done your research and know that you own a solid company. For traders, or short-term investors, a bad quarter for a company could mean selling everything. It could also mean a buying opportunity for investors since it might just be a small blip on the screen for a good company.
Joe Baker, CFP®
Baker Asset Management, LLC
joebaker@bakerassetmanagement.com
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