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Conclusion: whisper number irrelevant to stock price.
Some were up, some were down. Conclusion: whisper number irrelevant to stock price.
You'd think that all the companies having upside surprises would continue positive stock price momentum, but this wasn't the case. Conclusion: whisper number irrelevant to stock price.
While you'd think that if you missed both the estimates AND whisper number the stock would plummet, there's no pattern here. Conclusion: whisper number irrelevant to stock price.
For Foolish Four investors, this means very little, as the philosophy behind using a mechanical technique is to avoid the necessity of following companies on a quarterly basis.
For investors venturing into individual stocks, however, the release of the quarterly earnings report is the perfect time to awaken from stock market slumber and check up on how your company is doing. By reading the quarterly report, you'll learn how revenues and sales are (or aren't) growing, and how the company is functioning overall. You'll also find an earnings per share (EPS) number, which enables investors to compare the company's profits to quarters and years gone by.
Wall Street analysts earn their keep by "analyzing" companies and giving projections as to how they think the company will perform each quarter. They then report their predictions (the "analyst estimate") to various resources, like FirstCall and Zacks, who compile all the information into a consensus figure. From this number arises the media's reporting of a company's "beating" or "missing" earnings estimates -- and, depending on which way the company's short-term fortunes have fared, the sudden rise or fall of the stock price.
Recently, the emergence of "whisper numbers" has become a trend reported as valid news. According to EarningsWhispers.com, a site devoted to this concept, "Earnings Whisper Numbers are 'the analysts' real [emphasis added] earnings estimate." Huh? Does that mean that the other numbers are hokum earnings estimates?
Whisper numbers originated as unofficial and unpublished earnings forecasts that were circulated as rumors on Wall Street. "Official" analyst forecasts tend to be on the conservative side. Sometimes, a company will lead analysts toward lower EPS expectations in order to guarantee that they could comfortably attain them.
Traditional earnings estimates are derived from guidance given by the company, and information that the analyst garners from following the industry. The various published whisper numbers are derived from a variety of sources, including estimates submitted by self-directed and professional investors, contacts associated with a company, vendors or corporate customers of the company's, and discussion board rumors.
According to an article by Ken Kurson in Esquire, "Whisper numbers arose in reaction to two trends: (1) the blitzkrieg of interest in volatile Internet stocks, which react forcefully and immediately to earnings reports, and (2) the toadiness of the analyst system, in which herding is so prevalent that it's created a gulf between 'consensus' and reality."
In a widely referenced study by Mark Bagnoli of the University of Michigan, Susan Watts of Purdue University, and Messod Daniel Beneish of Indiana University, it was discovered that 78% of whisper numbers exceeded analysts forecasts. A Bloomberg study concluded that while professional analysts missed the actual earnings numbers by an average of 44%, the figures posted on the Internet "whisper" sites actually were closer to the actual EPS, although they were still off by an average of 21%. These studies show why people are paying attention to the whispers, and support Kurson's conclusion, but does beating or missing the whisper number have any impact beyond the wild gyrations in price that often happen when a company exceeds or fails to live up to expectations?
I decided to do my own informal study on the possibility of using whisper numbers to predict stock price trends. Using the whisper numbers and actual earnings numbers reported by EarningsWhispers.com, I looked at some recent earnings announcements.
Company Beat Earnings Estimates/Missed Whisper Number
Company Date Price Price on 4/10
YHOO 4/05 165 9/16 141 15/16
WMT 2/15 56 3/8 63 9/16
T 1/25 51 1/8 56 1/4
Company Beat Earnings Estimates/Matched Whisper Numbers
Company Date Price Price on 4/10
BBY 3/28 81 3/16 80 11/16
MU 3/20 133 5/16 121 5/8
COMS 3/20 68 9/16 52 15/16
AMAT 2/15 83 1/4 103 3/8
DELL 2/10 38 13/16 54 7/16
EMC 3/26 114 5/8 135 1/8
RNWK 1/25 78 15/16 44 3/4
AXP 1/24 151 5/16 143 3/16
Company Beat Earnings Estimates/Beat Whisper Numbers
Company Date Price Price on 4/10
ORCL 3/14 77 82 1/2
KM 3/6 9 5/16 9 7/16
CSCO 2/8 64 7/16 72 9/16
MMM 1/2 96 5/16 92 3/4
CPQ 1/25 32 5/16 29 3/8
EK 1/24 62 1/16 62 11/16
Company Missed Earnings Estimates/Missed Whisper Numbers
Company Date Price Price on 4/10
GT 2/9 22 3/4 28 3/8
AMZN 2/2 69 7/16 63 3/8
What does all this mean?
Absolutely nothing!
According to Business Week, John Markese, president of the American Association of Individual Investors, said that the value of whisper numbers is next to nil for investors who have a proven buy-and-hold strategy. "Whisper numbers encourage short-term or frequent trading, and that in and of itself isn't a sound investing strategy."
Investors should take short-term stock predictions with a grain of salt while they focus on the really important information -- the fundamentals -- when reviewing and analyzing stocks. For example, it is far more important to look at the growth rate of the EPS numbers than to simply compare it to what the analysts thought they would be. At EarningsWhispers.com, I found a telling quote: "Earnings Whisper numbers originate from analysts and begin spreading two or three weeks prior to a company's earnings release."
Be wary of things that have a tendency to "spread." Like streptococci, toe fungus, and middle-aged derrieres, they don't necessarily lead to positive results.