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Analysts Analysis - An Oxymoron:
Why Analysts Estimates Are Meaningless
Commentary provided by WhisperNumber.com

The word 'analyst' implies that there is actual analysis being conducted. This appears far from the truth. Case in point: Recently Best Buy Company (BBY) came out and offered earnings guidance of 41 to 43 cents. This guidance was above the analyst's estimate of 40 cents per share. A survey conducted by WhisperNumber.com of individual investors indicated an expectation 43 cents per share five days prior to the Best Buy announcement. This is where it gets confusing - within 24 hours those 'professional analysts' re-did their 'analysis' and came up with a re-tooled, re-worked, re-analyzed number of (you guessed it) 42 cents. Imagine the coincidence of the 're-analysis' and it coming in right at the mean of the company guided 41 to 43 cents?

Too many times individual investors are pushed the 'analyst bunk' (like the example given) that is reactionary and meaningless, let alone lacking any type of analysis.

In a recent quarter, Thomson Financial/First Call posted the following statistics: 'Of the 190 companies that have made announcements about their third-quarter earnings so far, about half have said their earnings would miss Wall Street's forecasts, while 22 percent said they would beat estimates, and 28 percent said their results would be on target.' Let's take a look at that last percentage in a different light - 'Analysts will be wrong/off target with 72% of their estimates'. A 72% RATE OF ERROR!! And yet...

Analysts maintain power and gain the most media coverage for consistently being wrong and reactionary. It is countless the number of times we have seen a company provide public guidance and only after the fact do analysts come in with the 'best' recommendation or outlook. The media gives them credit and accolades when they're wrong, then gives them further accolades after the fact when they change their numbers based on public data and 'look' right.

And don't buy into the media's 'Earnings Warnings Season' headlines. This is an erroneous statement as the data used to base the so-called 'warning' on is incorrect (72%, remember?). Companies don't issue warnings against analysts data, only guidance and corrections to these misleading data sources so as to counter the 'bunk' information provided to the public at an earlier date.

The 'Players' of Consensus Estimates and Earnings Whispers
Analysts also provide their 'guesstimates' to a host of firms, which aggregate and provide the bunk data. The primary firms doing this work are First Call (Thomson Financial), Reuters Research (formerly Multex), and Zacks Investment Services. For the most part these firms post the same numbers, from the same analysts, from the same brokerage firms. To no ones surprise, even when they're slightly different, they're still erroneous.

But a number of analysts then provide their so-called 'real' estimates to lesser-known firm called EarningsWhispers.com. According to EarningsWhispers, they too claim to collect estimates from brokerage analysts. We're not sure why analysts from any financial firm would secretly 'whisper' another (supposedly better) estimate, but that's what happens at EarningsWhispers.com. And based on an informal review of the data on Earningswhispers, the vast majority of analysts like to add or subtract a penny to their estimates that are provided to the mainstream firms. We recently visited EarningsWhispers for estimates on Yahoo and Alcoa (who were set to report earnings soon) but we were surprised to find no 'analyst earnings whispers' existed. In fact no estimates existed at all. But we suppose that some time over the next 5 business days the numbers will begin to appear. Odds are that they'll be a penny over the more traditional collectors of bunk.

(We contacted a number of well known institutional firms including Lehman Brothers, Friedman Billings Ramsey, and JP Morgan, and their legal counsel said there was absolutely no contact or relationship with any firm let alone earningswhispers.com where their analysts provide alternative data. Hmmm.)

Many of you are under the perception that WhisperNumber collects data from analysts. This could not be further from the truth. Since our inception in 1998 we have polled, surveyed, and collected data from registered individual investors that frequent our site. Why would we want to regurgitate a 72% rate of error??? Our data, the collective expectations from individual investors, has proven to be a more accurate and significant predictor of corporate earnings and stock movement around earnings announcements for eight years running.

You Be The Judge
Although we haven't focused much on the 'influence' of individual investors, let's take a look at some recent data (Q3 2003) from some popular companies. Take a look at which data had more influence on stock movement:

ActualResultStock Price
After Earnings
Yahoo!$0.08$0.10$0.08Meets analysts estimates, Missed Individual Investor ExpectationsDown
AOL$0.10$0.14$0.12Beats analysts estimates, Missed Individual Investor ExpectationsDown
Amazon$0.06$0.09$0.10Beats Both ExpectationsUp
Nokia$0.16$0.19$0.16Meets analysts estimates, Missed Individual Investor ExpectationsDown
eBay$0.35$0.40$0.37eBay raised its outlook (guidance), split its stock, beat the analysts estimates, but Missed Individual Investor ExpectationsDown
ADP$0.16$0.19$0.16Missed Individual Investor ExpectationsDown
Cisco$0.15$0.16$0.15Meets analysts estimates, Missed Individual Investor ExpectationsDown

Ultimately it's up to you to decide what data and research to use, and it's part of our job to provide you with information the mainstream media doesn't focus on. We hope you found this piece educational.
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