The Whisper Number Impact: An Apple Earnings Preview|
Whisper number at $7.59, thirty-one cents higher than analysts estimate
Apple (AAPL) reports fiscal fourth quarter earnings on Tuesday, October 18th, after market close. The whisper number is $7.59, thirty-one cents ahead of the analysts estimates. Apple has exceeded the whisper number in 40 of the 53 earnings reports we have data.
Trading on an earnings event requires an understanding of post earnings price movement, both after hours and intra-day. We'll take a look at the average post earnings price movement, when those moves occur, and if Apple presents an earnings trade opportunity.
Since Apple reports earnings after market close, it's important to look at after hours trading activity. Over the past four quarters the average price move in after hours trading following their earnings reports is +1.6%, a limited and positive price move. In other words if you took a long position prior to the past four earnings reports you were on the right side of the trade in three out of four trades.
The average price move during next available intra-day trading (market open to market close) for the past four quarters is -0.9%, a very limited and negative price move. The average price move within five trading days for the past four quarters following their earnings reports is -1.6%, a very limited and negative price move.
Longer term earnings analysis (last four years of earnings) shows the company tends to see (on average) price movement of +0.3% (intra-day) in one trading day following their earnings report, and price movement of +0.2% in five trading days.
Apple has topped the whisper number in the past four quarters, but short term they've lacked a consistent price reaction. In other words, beating the whisper number doesn't always translate to price strength. Although they've topped the whisper number in the past twenty quarters, the short term (intra-day) price reaction has been positive in only 40% of the reports. In the comparable quarter last year, Apple topped the whisper number by 55 cents. The stock dropped 4.6% in after hours trading, and only gained back 2% in one trading day. The stock finished up the quarter 6.9% higher.
And take a look at the table below:
When considering all quarters for which we have a whisper number, the best timeframe for positive returns falls at the thirty day mark. The 30-day price reaction for the forty quarters that Apple has topped the whisper shows an average price move of +3.9%. And for the 12 quarters it has missed the whisper number, an average price move of +9.2% in thirty trading days following earnings.
Other factors that may influence post earnings price movement;
The majority of investors polled are expecting the company to provide a positive outlook:
- Positive 85.7%
- Neutral 0.0%
- Negative 14.3%
Apple has a 77% positive surprise history (having topped the whisper in 40 of the 52 earnings reports for which we have data).
- Beat whisper: 40 qtrs
- Met whisper: 1 qtrs
- Missed whisper: 12 qtrs
The whisper numbers have proven more accurate than analysts estimates as well. Over the past twenty quarters the whisper number has been closer to the actual earnings in 19 of 20 quarters.
Summary: Over the past four quarters Apple has topped the whisper number by an average of $1.10 (a twenty-seven cent increase since last quarter). While the current whisper number is a significant thirty-one cents ahead of the analysts estimate, it may still prove conservative. The average price movement (after hours) is limited but positive. The average price movement (post earnings intra-day, long or short term analysis) is very limited. There is no consistent reaction to the whisper number, and there is strong confidence from investors for their next quarter's outlook. This could play against them if they fail to provide positive forward looking guidance. For most,the negatives outweigh the positives and data indicates Apple does not present a viable short term (one to ten trading days) trading opportunity. However, data does indicate decent returns (average 4% to 9%) with a long trade held thirty trading days past earnings.
When analyzing the data we collect, the most important aspects are how a company reacts to beating or missing the whisper number, the average post earnings price movement, and in what timeframe (click here to receive alerts). Keep in mind that trading on whispers is a technical play on market psychology, rather than a bet on a company's fundamental strengths.
A company's '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, "the percentage of companies that have beaten expectations often is cited as a barometer of corporate profitability, an indicator of how well the economy as a whole is doing or a predictor of where the stock market is going. What goes unsaid, however, is that these 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. And there is no reliable evidence that the stock market as a whole will earn higher returns after periods with more positive surprises."
"In short, 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."
Whisper numbers provide the unbiased earnings expectation proven more significant than the analysts estimates.
|Independent Academic Studies|
Whisper Numbers Still Beating the Best Minds on Wall Street
The whisper number data published by WhisperNumber.com continues to provide greater returns when used as an investment vehicle, and has a greater impact on stock movement than analysts consensus estimates.
These declarations are supported by not one but two academic studies and are published in the Financial Decisions journal. The first study released in late 2005 was titled 'Conflict in Whispers and Analysts Forecast: Which One Should Be Your Guide', and the second release was in mid-2007 titled "Do Bulls and Bears Listen to Whispers" (both courtesy of San Jose State University College of Busines and Pepperdine University.) On a side note, there are no studies that show any significant impact or trading usefulness of analysts estimates.
To learn more about these studies and how WhisperNumber.com has used the results to develop their unique trading tool called 'Whisper Reactors', select from one of the following links.
'Conflict in Whispers and Analysts Forecast: Which One Should Be Your Guide'
(published 2005, Financial Decisions Journal)
Results of this study conclude investor estimates for quarterly earnings (whisper numbers) provide greater returns when used as an investment vehicle, and have a greater impact on stock movement than analysts consensus estimates. Click here to learn more.
'Do Bulls and Bears Listen to Whispers'
(published 2007, Financial Decisions Journal)
A post-earnings announcement drift associated with the market reaction to analyst forecasts errors remains a puzzle. This study suggests that whispers help to explain part of the puzzle. The study examines the market reaction to whispers and analysts in bull and bear markets, and finds that investors listen to whispers in the bull market and whispers help explain the post-announcement drift. Click here to learn more.
Financial Decisions (journal) and Academic Studies:
'Conflict in Whispers and Analysts Forecast: Which One Should Be Your Guide'
'Do Bulls and Bears Listen to Whispers?'
Janis Zaima, Professor of Finance
San Jose State University
College of Business, Dept of Accounting & Finance
BIG, HNZ, URBN, CPB, GES
SKS, HD, NTAP, ADI, MDT
MRVL, TOL, SPLS, WSM, EGHT