A good article yesterday from John Mauldin’s Thoughts from the Frontline: ‘Earnings ex-losers look great’, touching on some of Saul’s interesting points about operating vs. reported earnings, analysts’ manipulation of results and one or two other things.
From John Mauldin’s Thoughts from the Frontline:
Somehow this innocent-sounding exercise [earnings forecasts] has evolved into a giant expectations shell game. For the most part, Wall Street doesn’t care if a company’s report is good or bad; it cares whether the results match, beat, or fall below the consensus analyst forecast. A company “wins” the game and earns a higher share price by delivering unexpectedly positive numbers. This creates all sorts of perverse consequences.
Louis Navellier is a successful investor and fund manager. I made good money using his Navellier’s MPT Review. He uses a number of stock screens that he reviews on a quarterly basis to see “What is working on Wall Street now.” In his The Little Book That Makes You Rich he explains the method [mostly double talk at which he is a master] giving a detailed explanation where he does not reveal the real secret sauce. LOL
One of his big screens is for “earnings surprises” where he games the “analysts’ consensus.” This works because many investors don’t drill down into the performance and react to the headline news. Of course, this is a trader’s tool, not a long term hold kind of strategy. Since investors react to earnings surprises it is important for fund managers to be ahead of the analysts’ consensus game.
Note: This is not a recommendation for Navellier, just an illustration of how the game is played by old hands.
The Little Book That Makes You Rich: A Proven Market-Beating Formula for Growth Investing by Louis Navellier
hat Mauldin letter deserves a link
For the most part, Wall Street doesn’t care if a company’s report is good or bad; it cares whether the results match, beat, or fall below the consensus analyst forecast. A company “wins” the game and earns a higher share price by delivering unexpectedly positive numbers. This creates all sorts of perverse consequences.
Profit projections made one year out are usually way too optimistic. Over the next twelve months they fall steadily
Early on, you tell people how wonderful the future will be when there’s no way anyone can prove you wrong.
Over the last 16 quarters (or four years),…more than two-thirds of all S&P 500 companies’ earnings beat expectations. In no individual quarter was the share beating less than 63%.
Consensus SP500 Analyst earnings forecasts start high and decline as the year goes on- every year, every time. One must assume this is the case for almost all individual stocks too.
The S&P data does in fact show that earnings-per-share growth is increasing
What is happening is that companies are using the ultra-low interest rates the Federal Reserve has set to borrow money to do stock buybacks, which give us the illusion of growing earnings without actually increasing them –
My own opinion is that any stock picking method that relies on analyst estimates is doomed to mediocrity in the long run.
When a website shows a company’s TTM EPS, would it be correct to assume that is reported (true) earnings?
While ‘next quarter’ or ‘next year’ EPS are operating (possibly false) earnings, being the collective projections of analysts.