Another earnings season is here and once again we will be subjected to a deluge of misconceptions, status quo references, and general unchecked 'known facts'.
Here are the top five earnings season myths to be aware of and avoid:
Myth #1: When a company reports earnings that beat analysts estimates, the stock will see strength.
While you could easily find examples of stocks experiencing price strength after reporting earnings that top estimates, over time there is just no proven correlation that this occurs with the majority of earnings reports. In fact, studies have proven that "there isn't anything surprising about earnings surprises. They aren't the exception; they are the rule. "All the numbers are gamed at this point," says James A. Bianco, President of Bianco Research.
For the past fifteen consecutive quarters, according to Bianco Research, 66% of the companies in the S&P 500 earned more than the consensus, or median, forecast by analysts. Last quarter was also the 56th consecutive quarter in which at least half of the companies surpassed the consensus forecast of their earnings.
Did all (or even a small majority) of those companies experience price strength following their earnings reports? Certainly not.
Myth #2: The stock market as a whole will earn higher returns after periods with more positive surprises.
This is a "macro" earnings myth, and is a carry over from myth #1. Simply put, there is no reliable evidence to support this premise.
Myth #3: Analysts.
Yes, analysts are a myth. According to the Wall Street Journal, "with trading volumes down on Wall Street and commission rates near record-low levels, brokerage firms are starved for the revenue that stock trading used to provide. Since changes in earnings forecasts encourage many investors to buy or sell, analysts have an incentive to revise their predictions more often. But that hasn't made the forecasts more accurate. On average, according to Denys Glushkov, research director at WRDS, stock analysts are revising their earnings forecasts nearly twice as frequently as they did a decade ago. And while the typical forecast missed the mark by 1% in the 1990s, that margin of error has lately been running at triple that rate."
The name "analyst" imply analysis, and if the above statement is correct, analysts can simply be called "pawns."
Myth #4: The mainstream financial media cares about better earnings data.
To be completely honest, we have no idea what the mainstream media cares about. Yes, obviously viewers, eyeballs, ad revenue, etc. But when it comes to the data they provide viewers, it really comes down to each journalists individual preference. The bias does tend to be more towards Wall Street analysts and estimates (see myths 1 thru 3), which should come as no surprise as many of the talking heads and financial media types were at one time (or still are) directly involved with Wall Street. Well known anchor Joe Kernan of CNBC was a VP at Smith Barney (having trained at Merrill Lynch). Pete Najarian, also of CNBC fame, is a founding member of One Chicago, an electronic exchange committed to becoming the global leader in futures on individual stocks, narrow-based indexes, and ETFs.
These are not independent influences looking to provide you with the best possible data. They are looking to provide you with what they know, are comfortable with, and prefer.
Myth #5: Independent earnings research is of lesser value
All data should be judged based on its performance and quality. Just because the independent data has not been accepted (yet) by the mainstream media does not mean it has little or no value. The independent Apple (NASDAQ:AAPL) analysts/bloggers/fanatics come closer to predicting Apple's actual earnings than any other source (they've proven their value over the past few years). WhisperNumber.com has provided more accurate and more useful earnings expectations data than any other source for the past fifteen years. There is great data available to all traders and investors and it's not that difficult to find and qualify. It's the reason why sites like SeekingAlpha are so popular - investors are hungry for the best possible source to provide them with the best possible data, and it's not coming from analysts or the mainstream media.
So the next time you're reading an article or watching the financial news, and an analyst comes on and says something like, "I expect most companies will top earnings estimates this quarter", or a reporter says "the stock is moving higher because they topped analyst estimates", just remember what you read here today, and go find some useful independent information.
Since 1998, WhisperNumber.com has been tracking and publishing 'crowd sourced estimates' for earnings. We call these earnings expectations whisper numbers. The 'crowd' that provides us with whisper numbers are primarily individual investors and traders just like you that have registered with our site.
We are an independent financial research firm. We have no affiliations with investment banks, investment management, or corporate organizations that could compromise our data or analysis. (So no relationships with the bad guys or so-called professional analysts).
As for our data collection, methodology, and price reaction accuracy: for the past 15 years we have remained consistent with data collection and methodology, and our data has proven itself over that time. We also have two independent academic studies supporting the premise that investor expectations for quarterly earnings (our whisper numbers) provide greater returns when used as an investment vehicle, and have a greater impact on stock movement than analysts consensus estimates.
A company's 'price reaction' to the whisper number expectation is the key - on average companies that exceed the whisper are 'rewarded', while companies that miss are 'punished' following an earnings report.
According to the Wall Street Journal, "positive surprises are becoming so common they are nearly universal. They are predetermined in a cynical tango-clinch between companies and the analysts who cover them. All the numbers are gamed at this point". This is why the proprietary whisper number we provide is a more useful and viable alternative to analysts estimates.
All trading involves risk and the information presented is not intended to be a recommendation of any kind.
Disclosure: I have no positions in any stocks mentioned, and no plans to initiate any positions within the next 72 hours.