Editors Note: As you will see (or have already noticed) we've modified our Earnings Sentiment Report a bit. Going forward, it will be more stream lined. Instead of a single monthly report containing six spotlight earnings reports for the month, it will now be released weekly (every Friday) and contain a minimum of two spotlight companies reporting earnings in the upcoming week. We also enhanced the Scoreboard section which is now the Upcoming Earnings Notables section.

The changes are based on subscriber requests for more data in a timelier fashion and this new release schedule will allow for just that. We'll also continue with our weekly Earnings Updates. Any suggestions or questions can be directed to David in client services. We hope you find the changes positive.

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Report Card (Review of last reports spotlight companies)

National Semiconductor (NSM) reported earnings of 27 cents on 12/7. This was in-line with the analysts estimate but one penny short of the whisper number. We told you "the average short term stock reaction is negative", and that was no different with this report. As expected, the one day reaction was negative and we expect weakness to continue over the next few trading days.

Verifone Holdings (PAY) topped both the whisper number and analysts estimate by three cents. We stated "if Verifone can beat expectations and provide a favorable outlook we would look for decent (short term) gains." As expected, the stock reaction was positive closing two points (+5%) higher by close of the following trading day.

ADOBE SYSTEMS (ADBE) is a classic reactor to the whisper number - meet or beat the expectation and look for positive price moves, miss and look for the stock to be punished. The whisper number for the current quarter shows confidence at two cents ahead of the analysts estimate. Last quarter they topped the analysts estimate by three cents, and exceeded the more accurate whisper number by one cent. The stock moved 9% higher within one day, and was 16% higher within 30 days.

COSTCO (COST) has a whisper number one penny ahead of the analysts estimate. They'll have to top this expectation to see a positive price reaction as, on average, the company shows negative price movement when they just meet or miss the whisper. Last quarter they only managed to meet the whisper and the stock was down 4% within five trading days.

A number of investors have asked how to best utilize our data. First, in order to make the best trades investors need to be aware of all factors affecting market moves. And that means understanding investor expectations (whispers). We'll restate something from a recent report: 'What we do know for sure is that company stock prices continue to react to beating or missing individual investor earnings expectations (whisper numbers) on a more consistent basis than analysts estimates.' More often than not when a company misses the whisper number the stock is basically 'punished' and will see a decline in price over a fifteen to thirty day period after earnings are released. And on average when a company beats the whisper the stock is rewarded and will see gains over a fifteen to thirty day period after earnings are released. It is a simple process that should not be over thought.

Let's take a look at Yahoo! (YHOO) from Q2 '05. They reported on July 19th. The analysts estimate was 13 cents and the whisper was 15 cents. They reported 13 cents (after market close) obviously matching the analysts but missing the whisper. If you anticipated them missing earnings you could have shorted the stock somewhere between 36 and 38. Within five days it was down to 34 (an 8% short gain). Let's say you didn't anticipate the miss and waited for the report. You entered a short position the day after earnings somewhere between 32.75 and 33.75. Within thirty trading days you exit the position at 32 for a 3.75% short gain. Miss the whisper stock gets punished.

If you don't like short positions, let's take a look at Apple Computer (AAPL) from Q2 '05. They reported on July 13th. Analysts expected 31 cents, investors had a whisper of 33 cents, and they beat both outlooks reporting 37 cents. If you expected them to beat the high whisper (we didn't) you entered a long position around 38 prior to the release. Within five days the stock was up to 43 and you were seeing 13% gains. If you waited until after the report you entered the market around 41. Within thirty trading days you're at 45 seeing gains of 9.7%. Beat the whisper stock gets rewarded.

Does it always work this way? Absolutely not. But historically the data has proven itself more accurate in predicting stock movement than analysts estimates (which shows no definitive cause and effect). Our data (since 1997) has shown an predictive accuracy rate between 70-82%. All of our commentary found in this report is based simply on the assumption (although not 100% accurate) that companies that miss the whisper will see a price decline and companies that beat the whisper will see a price increase.

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