There are numerous factors that affect post earnings price movement. Some are quantitative, some qualitative, some tangible, some intangible, some technical, and some fundamental. We consider 'investor expectations' to be the most influential and critical factor to understanding and anticipating post earnings price moves.
Let us first define what we mean by 'investor expectations'. Investors (professional, institutional, and individual) determine market direction. Some have more influence than others, but collectively, their expectations of stock price, stock direction, revenue, sales, etc. define the market. If investor expectations (real or perceived) of a company's future were bleak, the company stock price may suffer. If investor expectations (real or perceived) of a company's future were strong, the company stock price may surge.
It is the same with corporate earnings. When a company reports earnings that exceed investor expectations, the stock is rewarded. When a company reports earnings that fall short of investor expectations, the stock is punished. The simple fact is that expectations create surprises, surprises create volatility, and volatility creates opportunity.
FLAWED MAINSTREAM DATA
We hear from traders every quarter that they are losing money on stock and options earnings plays, and it comes down to one simple fact as to why: they use data and analysis based on the status quo 'industry standard'. The industry standard is the analyst's earnings estimate. The key to understanding the analyst's estimate is as follows: an estimate is not an expectation, does not create volatility, and will not create opportunity. The earnings estimate, therefore, provides very little in terms of value.
|"An estimate is not an expectation, does not create volatility, and will not create opportunity. |
The earnings estimate, therefore, provides very little in terms of value."
The word 'analyst' implies that there is actual analysis being conducted. This appears far from the truth. Consider the following example: Best Buy Company (BBY) offered earnings guidance of 41 to 43 cents. This guidance was above the analyst's estimate of 40 cents per share. A survey conducted by WhisperNumber.com of individual investors indicated an expectation of 43 cents per share five days prior to the Best Buy announcement. This is where it gets confusing - within 24 hours those 'professional analysts' re-did their 'analysis' and came up with a re-tooled, re-worked, re-analyzed number of (you guessed it) 42 cents. Imagine the coincidence of the 're-analysis' and it coming in right at the mean of the company guided 41 to 43 cents? You, and other investors, are then provided with the meaningless analysts estimate.
Think about it...the data that traders are provided through mainstream financial websites and media is flawed. The analyst's estimate has never been proven as a market-moving indicator, it has only been 'assumed' a market-moving indicator. It's the industry standard. This is what the individual investor is provided - 'analyst bunk' that is reactionary and meaningless, let alone lacking any type of real analysis.
The simple fact is the analyst's estimate does not have the same influence or correlation to price movement as an earnings expectation. While the analyst's estimate could be up to six months old, the earnings expectation is based on a current market expectation.
CONFLICT IN WHISPERS AND ANALYSTS FORECAST
Many traders are under the perception that WhisperNumber.com collects data from analysts. This could not be further from the truth. Since our inception in 1998 we have polled, surveyed, and collected data from registered individual investors of our website. The collective expectations from individual investors have proven to be a more accurate and significant predictor of stock movement following earnings announcements for eight years running.
|"Individual investor expectations for quarterly earnings (whisper numbers from WhisperNumber.com) provide greater returns when used as an investment vehicle"|
Just a little over a year ago the San Jose State University, College of Business in California conducted an independent study of the data compiled and published by WhisperNumber.com. The study, entitled 'Conflict in Whispers and Analysts Forecast: Which One Should Be Your Guide', was published in the fall edition of the acclaimed Financial Decisions journal. The conclusion? Individual investor expectations for quarterly earnings (whisper numbers from WhisperNumber.com) provide greater returns when used as an investment vehicle, and have a greater impact on stock movement than analyst's consensus estimates.
Aside from the fact that the study lends credibility to the methodology and data published by WhisperNumber, it also provides a solid investment strategy and direction to investors looking for better returns on earnings trades.
The key to the study is the conclusion that whisper numbers have an impact on stock movement - perhaps more important is that they have a greater impact than analysts estimates. In laymen's terms this means that a stock is more likely to see positive price movement following an earnings release if they exceed the whisper (earnings expectation), and more likely to see negative price movement following an earnings release if they fall short of the whisper number (earnings expectation).
|"Adobe (ADBE), Kohl's (KSS), Wal-Mart (WMT), FDX (FDX) and Abercrombie (ANF) all reported earnings that met or exceeded the analysts estimate by an average of 2 cents.|
Are all these stocks likely to move higher?"
Consider the following earnings situations from the recent quarter:
Adobe (ADBE), Kohl's (KSS), Wal-Mart (WMT), FDX (FDX) and Abercrombie (ANF) all reported earnings that met or exceeded the analysts estimate by an average of 2 cents. Assuming everything else that affects stock movement is equal, which stocks should move higher and which ones should move lower?
The common assumption provided to the average investor by the mainstream media is that all of these companies should see a positive post earnings price reaction as they met or topped the analyst's estimate. Where would you have put your money?
The answer? Without understanding the basic fact that 'expectations' influence markets, and without knowing which companies exceeded their expectation put upon them by the market, your 'guess' would be as good as any.
Now, we understand there are a multitude of factors that affect stock price following an earnings announcement. No one piece of data is the 'be all end all' factor that determines price direction. But understanding the proven correlation between price movement and specific influences (like the whisper number) is a valuable key to anticipating post earnings price moves.
|"In the ten trading days following their respective earnings release, only Wal-mart and Abercrombie saw weakness. They both missed the whisper number."|
But back to our examples: In the ten trading days following their respective earnings release, only Wal-mart and Abercrombie saw weakness. They both missed the whisper number.
Again, putting aside all other factors, would you put your trading dollars on the assumptions of the mainstream media? Believe it or not investors do it every day. And every day investors lose money.
Take a look a different but common earnings situation. The Chicago Mercantile and PepsiCo reported earnings that fell short of the analysts estimate. Again, mainstream media would have you believe the stocks would be punished and see price weakness as they missed the analysts estimate.
But both exceeded the whisper number. And by exceeding the expectations of the market, the stocks were rewarded and prices moved higher.
The focus of this report is on whisper number data because we are extremely familiar with where it comes from and its proven impact on stock movement following earnings. But did you know about its influence and credibility before reading this report?
The whisper number is an obvious data source for us to write on, but don't be an 'ignorant investor' and discount indicators or methodologies that may have value. And on the contrary don't waste a great deal of time and effort on those 'sounds too good to be true' offers (they usually are). We bring this up because we receive emails every quarter that criticize what we do. Ignorance of facts will never a good trader make.
We know it's difficult to break away from the mainstream, but unless you are willing and able to be open minded about proven and valuable data, your trading strategy will fail. Get beyond where the data comes from (although it's good to have an understanding of it) and focus on credibility and testing and proof.
Analysis of our most recent quarterly results show that companies that exceed both the whisper number and the analysts estimate see a 2.5 times greater positive post earnings price move than companies that only exceed the analysts estimate but miss the whisper.
The academic study mentioned earlier went on to provide some raw data results as well:
- A trading strategy using analyst forecasts alone generates approximately 2 to 3% more than the market index (ignoring trading fees) while a trading strategy using whispers alone generates about 3-4% more than the market index.
- Creating a trading strategy using whispers rather than analysts when the two differ and investing when the forecasts agree, investors can earn, on average, 6% to 8% more than the market index over the 3 days that include the earnings announcement date and 2 days after, again ignoring trading fees.
There is value in the whisper number data, and greater value in a better understanding of its influence on post earnings price movement.
ANTICIPATING POST EARNINGS PRICE MOVES
Most of the free reports offered by financial service companies provide some value, and we hope you gained a better understanding of the influence of market expectations on earnings. But while all these free offers provide some value, there is also 'the next step'. In this case the next step is gaining access to the most valuable expectations data that can help you anticipate post earnings price moves.
Obviously knowing which companies are most likely to react to beating or missing the whisper number has value. Having a target timeline, target price move, and advanced knowledge of this data with email alerts adds more value.
You could spend years collecting and analyzing your own data, and coming up with an analysis of best companies. WhisperNumber.com has completed the analysis for you. Anticipating price moves is not easy, and there can be no guesswork involved.
For more information and analysis of those companies most likely to react to the whisper number - those companies that have a high probability of positive price movement following the earnings report if they beat the whisper number, and negative price movement if they miss the whisper number - click here to learn about the Whisper Reactors service