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There might be another issue at play here: perhaps the investment firms represented by the professional analysts have incentive to under-predict a company's per

There might be another issue at play here: perhaps the investment firms represented by the professional analysts have incentive to under-predict a company's performance in their public-facing reports.

aspiringsensei 16y ago
Do you mean "incentive to predict conservatively" rather than "incentive to under-predict"?
- brown9-2 16y ago
  Sort of, "conservatively" would imply "keeping it safe" when predicting earnings, but I was really trying to raise the question of if the firms have anything to gain by deliberately making public predictions that are lower than they truly believe.
andylei 16y ago
there are many studies that show that analysts are actually generally overly optimistic. there's no issue at play. the sample size here is one
diba 16y ago
Yeah, my friend who is more knowledgeable than myself in equity trading said this a few days before apple reported earnings: "The reason is so that on earnings day, AAPL can crush "consensus" earnings estimates and have their stock price increase. This is what Steve Jobs wants to happen, and the street analysts are happy to fall in line so that he'll continue to meet with them (or their clients) and/or do business with their firm if Apple ever needs investment banking advice The next question you might ask is: doesn't this look bad for Apple if people are projecting worse earnings into the future? Don't stocks trade loosely on things like P/E ratios? The answer is that if you look out a full year, the effect is actually the exact opposite, analysts tend to be way too optimistic (link<http://www.ritholtz.com/blog/2010/06/mckinsey-equity-analysts-are-sti...&#62 http://www.ritholtz.com/blog/2010/06/mckinsey-equity-analyst...; ). You can see how this would work. You look at earnings estimates a year out and think: "man, this stock looks pretty good if earnings are going to grow X% over the next year". And then you look at the next quarter results and say "man they did better than expectations! This stock must be REALLY good. Maybe they will grow at X+5% over the next year!". What you failed to realize was that earnings estimates will be decreased over the course of the year like clockwork, and eventually that yearly estimate that was too bullish will turn into a quarterly estimate that is too bearish. The result of all this is the the graph above, with amateurs forecasting an extra 10% in quarterly revenue and extra 20% in EPS."

aspiringsensei 16y ago

Do you mean "incentive to predict conservatively" rather than "incentive to under-predict"?

brown9-2 16y ago
Sort of, "conservatively" would imply "keeping it safe" when predicting earnings, but I was really trying to raise the question of if the firms have anything to gain by deliberately making public predictions that are lower than they truly believe.

andylei 16y ago

there are many studies that show that analysts are actually generally overly optimistic. there's no issue at play. the sample size here is one

diba 16y ago

Yeah, my friend who is more knowledgeable than myself in equity trading said this a few days before apple reported earnings: "The reason is so that on earnings day, AAPL can crush "consensus" earnings estimates and have their stock price increase. This is what Steve Jobs wants to happen, and the street analysts are happy to fall in line so that he'll continue to meet with them (or their clients) and/or do business with their firm if Apple ever needs investment banking advice The next question you might ask is: doesn't this look bad for Apple if people are projecting worse earnings into the future? Don't stocks trade loosely on things like P/E ratios? The answer is that if you look out a full year, the effect is actually the exact opposite, analysts tend to be way too optimistic (link<http://www.ritholtz.com/blog/2010/06/mckinsey-equity-analysts-are-sti...&#62 http://www.ritholtz.com/blog/2010/06/mckinsey-equity-analyst...; ). You can see how this would work. You look at earnings estimates a year out and think: "man, this stock looks pretty good if earnings are going to grow X% over the next year". And then you look at the next quarter results and say "man they did better than expectations! This stock must be REALLY good. Maybe they will grow at X+5% over the next year!". What you failed to realize was that earnings estimates will be decreased over the course of the year like clockwork, and eventually that yearly estimate that was too bullish will turn into a quarterly estimate that is too bearish. The result of all this is the the graph above, with amateurs forecasting an extra 10% in quarterly revenue and extra 20% in EPS."