It’s that time of year again folks, earnings season. When investors obsess over the minutiae of a company’s results, pour over guidance, and analysts send out a wave of upgrades and downgrades. However, you need to keep two things in mind.
First, and foremost, whether or not a company “misses” or “beats” expectations? That is completely irrelevant. Think about it this way. Analysts decide on consensus estimates by plugging in dozens or even hundreds of variables into spreadsheets that spit out a guesstimate. Why is it management’s responsibility to hit such a random target? Shouldn’t it be up to the analysts to prove their understanding of a company, and the validity of their models, by getting as close as possible to the actual results?
After all, you can find 1 year, 3 year, and even 10 year growth forecasts online, via numerous sources. Wouldn’t it be of far greater value to know which analysts are the most accurate? And then use their research to due your own due diligence?
Instead we have “hits” and “misses” that can result in swings of 5% to 10% in a single day for even blue chip stocks.
Just this week we saw McDonald’s, Johnson & Johnson, IBM, and Intel release good results, but because they either didn’t live up to expectations, or because analysts didn’t like the company’s guidance, shares cratered once results were out.
Now here is the biggest secret on Wall Street, at least in terms of generating long-term market beating results. EARNINGS DON’T MATTER!