We know the difficulty today of being in the Prediction Business, as economists and stock analysts are squarely in this business. The Prediction business is fraught with over-optimism and over-pessimism. Is it a tough job? Yes
When it comes to the financial markets, this prediction game, specifically with regards to earnings estimates, is repeated over and over again around quarterly earnings reporting season. With the wide usage of options and at-the-money daily option expiration, it seems much more prevalent today versus years’ past.
How exactly does it go?
Take a look at Apple reporting on April 26th. Investors obsess about all things Apple…
- number of iPhones they sold in the quarter
- earnings per share
- service revenue
- cash levels
- forward guidance and outlook
- and much more
The kicker seems to be forward guidance.
Think about it from the company's perspective: should they issue rosy guidance? Or, should they set the bar low so that it is easy to jump over in next quarter's report? The forward guidance has become the bearish speculator’s trump card… "yes they did beat on top, bottom and middle lines but next quarter is going to be challenging."
Huh? Did the company not just produce results that surpassed expectations?
Why haven’t analysts caught on to this yet?
At Granite Wealth, we keep a close eye on companies we hold in our portfolio earnings trend, and the stocks’ reaction to those earnings. It regularly has us scratching our heads.
Triple beats and the stock STILL sells off during after-hours trading and thought the next day. The short-term holders have their day, but after the knee-jerk reaction and weigh-ins from professional analysts, the stock recovers and pushes higher.
So far early in the reporting season when many of the financial companies report (we have never felt these give an accurate read on earnings trends) the beat rate has been high, but, according to script, these stocks have sold off.