Thursday, May 12, 2011

Problem with Analysts & Stock Reports

I find it really sad that small time investors are battled with, honestly, what is bad information. What do I mean?  I certainly am not talking about insider trading the Raj the big hedge fund investor that recently got his hand slapped.

What I'm talking about his analyst expectations.  You see it all the time, XYZ company beats expections by $0.01.  What does this mean?  Well... analysts all predict prior to the end of the quarter that XYZ is going to have this much revenue, this much profit.  And they typically report this as a ratio of either of those numbers to the # of shares outstanding. Say XYZ company has 100M shares and they expect a profit this quarter of a $1m, then the street expects $0.01 per share.  Say the company announces $2M, the they beat the street by $.01.

So..how do analysts come up with revenue numbers. Most of the time, they get it from the company themselves. XYZ hosts analysts meetings they give the analysts a view into the numbers long before the end of the quarter. This is called guidance and its very common.  Some analysts take the numbers and use them without any checking. Some do their home work... they called "expert firms" and talk to experts on that company and ask them their opinion.  Others do whats called channel checks...they call up resellers of that product (if there is one) and ask them how sales are doing. If its a retail product, they even get weirder and have people count customers going in the door.. I've even heard of some analysts using satellite imagery and counting cars in the parking lots of stores and comparing it over time. Crazy!

Here's the issue and my point... generally the number that analysts have is already given to them (its typically a range) by the company itself. So.. technically..its rigged. If I want things to sound great at my company...I guide the analysts to a lower number than i actually think I'm going to hit...then when earnings come out... I beat the estimates.

So..this is totally bogus...and its just Newspaper title generating information. One recent was Cisco.  Articles entitled "Cisco Beats Estimates" were over the news.  But... dig into the numbers and you see that Profit actually dropped 16% and that their biggest profit maker, network switches, saw a revenue decline of 9%.

Avoid the headlines and actually look at the data!

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