February 14th, 2013
We’re driving home when my wife turns on her smartphone and begins checking her emails. She comes across the latest issue of a fundamental newsletters to which she subscribes, Earnings Whispers, and begins reading aloud some of the results reported in it that day, February 5, 2013:
- USANA Health Sciences Inc (USNA) said it expects 2013 earnings of $5.10 to $5.25 per share on revenue of $700.0 million to $720.0 million. The current consensus earnings estimate is $4.84 per share on revenue of $689.5 million for the year ending December 31, 2013.
- HNI Corporation (HNI) said it expects a first quarter non-GAAP loss of $0.07 to $0.01 per share. The current consensus earnings estimate is $0.06 per share for the quarter ending March 31, 2013. However, the also company said it expects 2013 earnings of $1.25 to $1.45 per share. The current consensus earnings estimate is $1.40 per share for the year ending December 31, 2013.
- AFLAC, Inc. (AFL) said it continues to expect 2013 earnings of $6.86 to $7.06 per share on a constant currency basis, but if the US Dollar/Japanese Yen averages 90, then it expects 2013 earnings of $6.37 to $6.57 per share. The current consensus earnings estimate is $6.68 per share for the year ending December 31, 2013.
Unable to focus on the important of the “news” because I was driving, I asked her to just forward that email to me so I could take a closer look later. The next day, I attempted to make my way through as many of those “earnings guidance announcements” only to find that they made little sense, had little relevance and, I thought, were as virtually useless to me the next day as they had been the previous night.
Wall Street fails to acknowledge that earnings announcements and expectations are actually relative, comparative things: one isn’t correct and the other not, one isn’t bad and the other good …. in these cases, the only thing that can accurately be said is how one compares to the other. It impossible to know whether a wide discrepancy between the number a company reports and the a “mathematical average” of the expectation of the Wall Street analysts who follow the company for various firms is due to gross miscalculation on the part of the analysts or performance on the part of the company. I’ve always believed that a fairer, more accurate measure of performance is to compare the current results relative to the results in a comparative prior period.
The only reason, in my humble opinion, the media and Wall Street place so much emphasis on these comparison is to reinforce their sense of self-worth and to prop up the notion that stock prices are somehow precisely linked mathematically to the consensus and “accurate” view of the companies’ anticipated future results. Furthermore, when there are differences between that consensus view and actual results (or the companies’ expectation of what those results will be) then “an perfectly efficient market” would instantaneously and correctly adjust the stock prices to those new “facts”. According to their view, every company somewhere has a hidden “fair value” that its stock is gravitating towards and supply, demand and momentum has nothing to do with it, if they exist at all.
Sixty-one companies announced some guidance on February 5:
- The market was in an uptrend for the five trading days prior to the 2/5 announcements and continued higher over the five days after.
- The biggest reversal in direction was for stocks that were in a negative trend prior to Negative Guidance; 9 of 15 stocks traded higher over the 5 subsequent days for an average gain of 4.5%
- Regardless of whether Guidance was Inline, Negative or Positive, 73.7% of the reporting stocks were higher five days later than on the day of the announcement.
- The largest percentage (21%) of stocks that reversed trend down after announcing were actually stocks that gave Inline guidance.
Granted, five days before and after is arbitrary, a sample of 61 announcements is small but these results only confirm for me my decision basically to tune out, to mute, to ignore all the “Earnings Season” nonsense and to focus instead on what the big money is actually doing as reflected in longer-term stock charts.