Why Earnings ‘Expectations’ Are Nothing but Lies and BS

by Jeff Reeves | September 30, 2011 5:00 am

Last quarter, as earnings reports drew to a close, I read a great article about how the “beat the Street” game is BS[1]. I couldn’t agree more and want to revisit this idea now as we enter yet another quarterly earnings season.

It’s no secret how Apple (NASDAQ:AAPL[2]) “surprises” Wall Street every quarter with its earnings. In fact, if you followed InvestorPlace.com contributor Jaime Dlugosch last quarter into the idea that Apple stock is “free money” around earnings[3], you would have made a nice 5% profit in just a few trading days as the stock soared after it’s last report.

earnings graphic 300x226 Why Earnings ‘Expectations’ Are Nothing but Lies and BS
Click to Enlarge
But the phenomenon is not limited to Apple. Last quarter, Mish Shedlock at Minyanville noted that the majority of stocks have beaten the Street every year since the third quarter of 1998. Just check out the accompanying graphic (courtesy of Mish and Minyanville) to see for yourself.

I did a quick and dirty study of the phenomemon to verify this trend, taking the a look at how the 30 Dow Jones components performed against consensus earnings targets in each of their past four quarterly reports. That is a sample of 30 stocks across 120 quarters.

Here’s how things shook out:

Wrap your head around that. There are dozens of Wall Street “experts” placing earnings targets on each of these stocks, and this group manages to collectively underestimate these companies a stunning 80% of the time!

I guess we shouldn’t be surprised. After all, this is the way Wall Street works. God forbid you put a “sell” recommendation on a stock and piss off management. What if they need help on a bond offering or a merger deal from your company? Then you’d miss out on that seven- or eight-figure fee. And if you’re a small analyst firm, do you really want to make a name for yourself by crying “foul” on some of the big boys? It’s in everyone’s best interest to just smile and congratulate companies on having such a bang-up quarter.

That’s fine for Wall Street insiders, but it’s all the more reason why regular investors should completely ignore the whole idea of earnings “expectations” or the thrill of “beating the Street.”

You don’t need a crystal ball to pick stocks that are going to beat earnings forecasts. After all, this quick study indicates it happens 80% of the time.

And I’m going to go out on a limb and predict that Apple beats expectations yet again in two weeks when it reports earnings Oct. 18.

Jeff Reeves is the editor of InvestorPlace.com. As of this writing, he did not own a position in any of the aforementioned stocks. Write him at editor@investorplace.com[34], follow him on Twitter via @JeffReevesIP and become a fan of InvestorPlace on Facebook.

Endnotes:
  1. the “beat the Street” game is BS: http://www.minyanville.com/businessmarkets/articles/earnings-reports-stocks-stock-market-stock/8/17/2011/id/36386
  2. AAPL: http://studio-5.financialcontent.com/investplace/quote?Symbol=AAPL
  3. Apple stock is “free money” around earnings: http://investorplace.com/2011/06/apple-reports-earnings-aapl-stock-bby-crm/
  4. MMM: http://studio-5.financialcontent.com/investplace/quote?Symbol=MMM
  5. T: http://studio-5.financialcontent.com/investplace/quote?Symbol=T
  6. AA: http://studio-5.financialcontent.com/investplace/quote?Symbol=AA
  7. AXP: http://studio-5.financialcontent.com/investplace/quote?Symbol=AXP
  8. BA: http://studio-5.financialcontent.com/investplace/quote?Symbol=BA
  9. BAC: http://studio-5.financialcontent.com/investplace/quote?Symbol=BAC
  10. CAT: http://studio-5.financialcontent.com/investplace/quote?Symbol=CAT
  11. CSCO: http://studio-5.financialcontent.com/investplace/quote?Symbol=CSCO
  12. CVX: http://studio-5.financialcontent.com/investplace/quote?Symbol=CVX
  13. KO: http://studio-5.financialcontent.com/investplace/quote?Symbol=KO
  14. DD: http://studio-5.financialcontent.com/investplace/quote?Symbol=DD
  15. DIS: http://studio-5.financialcontent.com/investplace/quote?Symbol=DIS
  16. GE: http://studio-5.financialcontent.com/investplace/quote?Symbol=GE
  17. HD: http://studio-5.financialcontent.com/investplace/quote?Symbol=HD
  18. HPQ: http://studio-5.financialcontent.com/investplace/quote?Symbol=HPQ
  19. IBM: http://studio-5.financialcontent.com/investplace/quote?Symbol=IBM
  20. INTC: http://studio-5.financialcontent.com/investplace/quote?Symbol=INTC
  21. JNJ: http://studio-5.financialcontent.com/investplace/quote?Symbol=JNJ
  22. JPM: http://studio-5.financialcontent.com/investplace/quote?Symbol=JPM
  23. KFT: http://studio-5.financialcontent.com/investplace/quote?Symbol=KFT
  24. MCD: http://studio-5.financialcontent.com/investplace/quote?Symbol=MCD
  25. MRK: http://studio-5.financialcontent.com/investplace/quote?Symbol=MRK
  26. MSFT: http://studio-5.financialcontent.com/investplace/quote?Symbol=MSFT
  27. PFE: http://studio-5.financialcontent.com/investplace/quote?Symbol=PFE
  28. PG: http://studio-5.financialcontent.com/investplace/quote?Symbol=PG
  29. TRV: http://studio-5.financialcontent.com/investplace/quote?Symbol=TRV
  30. UTX: http://studio-5.financialcontent.com/investplace/quote?Symbol=UTX
  31. VZ: http://studio-5.financialcontent.com/investplace/quote?Symbol=VZ
  32. WMT: http://studio-5.financialcontent.com/investplace/quote?Symbol=WMT
  33. XOM: http://studio-5.financialcontent.com/investplace/quote?Symbol=XOM
  34. editor@investorplace.com: mailto:editor@investorplace.com

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