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.

Why So Many Earnings Surprises Aren't So Surprising


You can't fire your research staff and expect quality research.

Earnings season is in full throttle, which means it's time, yet again, to examine the expectations game and whether or not earnings season really matters.

The big takeaway from this season, so far, is that companies are beating estimates like never before. The Associated Press calculates that 81% of corporate reports so far have exceeded Wall Street's expectations, while the Bespoke Investment Group finds that 74% have come in on the upside.

Beating the numbers is nothing new, of course. In fact, there has never been a quarter in which more companies missed the mark than beat it. But 74% or 81% -- either way you slice it, the third quarter of 2009 is turning out to be exceptionally exceptional for positive earnings surprises.

Which begs the obvious question: Why?

Last week, Doug Kass at argued that this season's numbers, while very good, were based on lowered expectations, so the number of upside surprises is less meaningful than the "chest-thumping bulls in the media" would have you believe.

An AP report over the weekend chalked it up to the familiar old earnings game tactics: Companies go to great lengths to guide analysts lower, thus giving them more room to pleasantly surprise investors.

Bespoke poked a hole in both arguments, citing statistics that show analysts actually raised their expectations for the companies they cover more often during the summer months than they lowered them. And in fact, they argue, high "beat rates" tend to signal a top in the market, so the great number is definitely meaningful when examined against historical data.

Case in point: The last quarter that saw a high beat rate (73%) was in the third quarter of 2006. And we know what happened next.

Over at Daily Finance, Peter Cohan revives another old and tired explanation for the high beat rate, one that many thought would go away after the research regulations following the Spitzer era. The reason why so many companies are exceeding expectations, Cohan argues, is because analysts are under pressure from their investment banking colleagues to avoid upsetting corporate clients.
< Previous
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