Sorry!! The article you are trying to read is not available now.
Thank you very much;
you're only a step away from
downloading your reports.

The Earnings Revisions Circus


Watch analysts scramble to adjust all things upward.

In retrospect, I believe history will show that one of the more interesting phenomena associated with the 2008-2009 financial crisis and the subsequent recovery, will be the dramatic breakdown of valuation discipline on the part of the Wall Street sell-side analyst community. This phenomena, that we're currently witness to, may be the subject of interesting future academic studies.

Analysts that had been far too late in identifying potential problems in the economy, their sectors and their companies, were evidently caught by surprise by events in late 2008 and early 2009. The future uncertainty emanating from the financial crisis certainly led to complications in EPS estimation.

However, I believe history will show that it was, above all, the collapse of market prices that lead to a panic in the analyst community. This panic was accompanied by a concomitant loss of analytical rigor in the estimation of EPS, and above all, in the setting of price targets by analysts. Analysts essentially let collapsing market prices determine their price targets rather than setting price targets based on a disciplined valuation methodology.

The ongoing correction of this irrational overreaction by the analyst community has huge implications for the market in the coming months.

Earnings Revisions

Bespoke Investment Group recently published an analysis on earnings revisions that's worthy of perusal.

The data gathered and elegantly presented by Bespoke empirically confirms something that I've been emphasizing in my writings: In late 2008 and early 2009, many analysts got caught up in the atmosphere of doom and gloom, and overreacted - overshooting in their downwards revisions of earnings. Many of these same analysts are now scrambling to revise their EPS numbers upwards.

Earnings revisions are still net negative by a slight margin (-5.5%). However, the turn in the second derivative of earnings revisions (which plunged below -60% in November) has been spectacular. You can especially see this on the graphs on pages 3-4 of the Bespoke analysis. Indeed, the earnings-revisions indicator has improved so much that it's now comfortably above levels prior to the Lehman crisis.

Indeed, statistical analysis suggests that if the market were to follow the path of earnings revisions -- and market returns have historically correlated quite closely with earnings revisions -- the S&P 500 would currently be well above 1,200.

Notwithstanding the above observation, I find it far more interesting to look at the revisions statistics by sector and by group. This sort of segmented approach leads to mostly bullish investment implications. Specifically, a segmented analysis shows that the most economically relevant and sensitive sectors are showing the most positive revisions momentum

For example:

1. Personal consumption represents about 70% of US GDP. The consumer discretionary sector as a whole (+29.3%), including consumer durables (+2.9) are exhibiting strong upwards earnings revisions.

2. The US is primarily a service economy (68% of GDP), and the vast majority of that is focused on consumer services. So it's good to see consumer services as one of the groups with the highest revision ratios (+34.9%).
No positions in stocks mentioned.
The information on this website solely reflects the analysis of or opinion about the performance of securities and financial markets by the writers whose articles appear on the site. The views expressed by the writers are not necessarily the views of Minyanville Media, Inc. or members of its management. Nothing contained on the website is intended to constitute a recommendation or advice addressed to an individual investor or category of investors to purchase, sell or hold any security, or to take any action with respect to the prospective movement of the securities markets or to solicit the purchase or sale of any security. Any investment decisions must be made by the reader either individually or in consultation with his or her investment professional. Minyanville writers and staff may trade or hold positions in securities that are discussed in articles appearing on the website. Writers of articles are required to disclose whether they have a position in any stock or fund discussed in an article, but are not permitted to disclose the size or direction of the position. Nothing on this website is intended to solicit business of any kind for a writer's business or fund. Minyanville management and staff as well as contributing writers will not respond to emails or other communications requesting investment advice.

Copyright 2011 Minyanville Media, Inc. All Rights Reserved.
Featured Videos