February 14th, 2013

Earnings Guidance vs. Wall Street Expectations

imageWe’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:

Earnings GuidanceSome interesting facts about those announcements:

  • 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.

 

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July 2nd, 2012

“Mind the Gap”

I was struck by the stock action of two buyout announcements prior to their recent announcements.  We all found out about over the past couple of days but it’s clear by looking at several gaps up over the past couple of months in both of the stocks that some who knew about the prospective deals at higher than market prices were jumping in ahead of the announcements.

    1. AMLN: On Friday, Reuters reported that “Bristol-Myers Squibb Co will buy biotechnology company Amylin Pharmaceuticals Inc for about $5.3 billion in cash [or $31 per share]. Bristol-Myers said late on Friday it had also reached a follow-on deal with UK-based AstraZeneca PLC to collaborate on developing Amylin’s products once the buyout is completed, expanding upon an existing partnership between the two pharmaceutical makers in diabetes treatments.”  But AMLN has been one of the best market performers this year appreciating from $12 at the end of 2011 to $28.20 at Friday’s close.  Even more interesting were the five gaps with the first being in January and the largest in March, each accompanied by higher than average trading volume.

  1. QSFT: According to RTTNews.com, “Trading in shares of Quest Software Inc. (QSFT: News ) was halted. Dell (DELL: News ) has agreed to acquire the company for $28.00 per share in cash for an aggregate purchase price of approximately $2.4 billion, net of cash and debt.”  QSFT also saw 4 pre-announcement gaps higher over the past four months as the stock raced ahead from $19 in March to Friday’s close of $27.81; these gaps were also accompanied by higher than average volumes.

I bring these to your attention is not for political reasons but to underscore another technical indication of a possible trading opportunity.  Anyone who’s ever ridden a subway or commuter train has heard the warning to “mind the gap” between the train and the platform.  A similar warning can be made to traders.  Not every price gap up with higher than average volume leads to a tender offer but many often can present some quick (over a few days to a couple of months) and profitable trading opportunities.

February 7th, 2012

How Reliable Is Insider Buying as An Indicator

I don’t know whether insider buying should be considered a part of the fundamental or technical arsenal but as far as I’m concerned, it surely isn’t a very reliable indicator to use when deciding whether to buy a stock or not in a market that appears to be on the verge of breaking higher in a major way.  The indicator I’m referring to is “insider buying”.  SeekingAlpha just ran a piece entitled “4 Stocks With Heavy Insider Buying” and the stocks mentioned were: IEP (Icahn Enterprises), RDEA (Ardea Biosciences), HES (Hess Corp) and WEN (Wendy’s Corp).  As Cramer would say, “Yes, you’re diversified!” …. but is it anything else?

According to the lead in the SeekingAlpha story,

“There can be many reasons why insiders might sell their own company’s stock: a big personal purchase like a house; cash to fund a charity; and many other reasons.  Whichever the case is, insiders usually buy shares because they think the stock is a bargain and has upside potential. When mutual funds or hedge fund managers (and even everyday investors) see a lot of insider activity, it most definitely triggers a reason to take a second look at the company.”

My “stock chartist’s” view of each of the stock’s charts is the none contain sufficient evidence in the form of trend or pattern to make a compelling argument for buying any of them today. In other words, they may be great buys in the future but there are many other stocks available with better charts that are worth taking a risk on today.

  • IEP: “the most intriguing news is the fact that the chairman of the board reported to have bought 411,755 shares at $36.79 amounting to a total of $15,149,825. I believe this warrants a second look.”  That may be true based on “insider buying” but it’s going to be a while before momentum builds sufficiently to cause the stock to break out of its 3 1/2 year horizontal symmetrical triangle.  It would take a move above 41.50 and preferable 45 for a buy signal:
  • RDEA: “The chart shows a possible trend reversal for this stock, and perhaps best of all, a director just bought 876,828 shares at $17 amounting to a total of $14,906,076, and another director bought 426,470 at $17 amounting to $7,249,990.”  That’s a nice commitment but wouldn’t you be upset if directors lacked confidence in the firm on whose board they served and instead were dumping the shares?  When you look at the chart, you see a stock that ramped up nicely after its IPO but then faltered during the financial crisis crash.  It’s to early to tell whether the current pattern evolve into a buyable double-bottom?
  • HES: “the most intriguing is the fact that the Chairman of the Board and CEO just bought 91,250 shares at $54.79 amounting to roughly $5M.”  I concur!  I see little intriguing in the stock chart to warrant a purchase today.
  • WEN: “Recently there have been a total of nine directors buying up shares in the $4.75 – $4.87 range. Each director bought a total of 875,000 shares, a total of 7,875,000 shares amounting to roughly $37M.”  Restaurant stocks have been hot lately but WEN hasn’t seemed to be able to participate.  Perhaps it’s lack of participation and it’s absolutely boring chart (although filled with potential) pattern, low price and potential high volatility makes for an interesting speculative buy.

Bottom line: I’ll ignore insider buying and stick with good charts. Of the four, I’d put my money on WEN joining the rest of the Industry Group leaders.

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