July 24, 2000
Fish or Cut Bait: Whisper me timbers!
By Paul R. La Monica
Redherring.com, July 24, 2000
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Chalk up yet another win for irrational behavior on Wall Street.
As I pointed out in last week's column on Broadvision (Nasdaq: BVSN), the market is devoid of reason. Some
big tech companies released their earnings reports this week, and the Street's reaction reinforces my conviction
that logic, for many investors, is a foreign concept.
Earnings season is now underway, and investors should be scrutinizing companies' performances for the past
quarter. For a company's health, one of the most widely watched gauges is whether or not the company beats the
earnings expectations of Wall Street experts. But there is one big problem: Nobody can agree anymore on what
exactly these expectations are.
Typically, companies are judged on whether they beat the consensus estimates as tracked by firms like First Call
and I/B/E/S. But there are also unofficial "whisper numbers." And these numbers, which tend to be higher than
official earnings estimates -- and often unreasonably so -- are becoming increasingly important in the scheme
of things. That's led to some disturbing paradoxes in the market.
WINNERS ARE LOSERS
What you are about to read is the honest-to-God truth. No names have been changed to protect the innocent.
This was an actual headline on Bloomberg last Wednesday: "U.S. stocks decline as Apple, Veritas report
lower-than-expected earnings."
Sure, that sounds simple enough to comprehend. But when you read the entire story, you find out that both
stocks beat the First Call consensus estimate!
Maybe I'm just a hopeless, old-school fool for still believing in investing anachronisms such as common sense.
Perhaps someone can explain to me how it is mathematically possible for a company to post
better-than-expected earnings that also happen to be lower than expected? Reminds me of a line from the
movie White Men Can't Jump.
"Sometimes when you win, you actually lose. And sometimes when you lose, you actually win. And sometimes
when you win or lose, you actually tie. And sometimes when you tie, you actually win or lose."
It's market newspeak that would put George Orwell to shame.
CONFUSION REIGNS
Confusion and ambiguity are, unfortunately, becoming commonplace in stories about earnings reports in the
financial press. Apple Computer (Nasdaq: AAPL) was expected to report 44 cents a share and came in at 45
cents, but the most aggressive whisper number was 47 cents. So Apple's quarter gets labeled a disappointment
by some and a success by others.
My problem with the whisper number is that there is a total lack of structure and order in its derivation. At least
a consensus Wall Street estimate is the average estimate of analysts whose job (in theory at least) it is to track
and rate stocks. Where do the whisper numbers come from? These numbers are part gossip -- coming from the
same analysts, when they actually think that companies will do better than their own predictions -- and part the
result of the wild, woolly world of investing chat rooms.
But should rumors and the opinion of the masses count when it comes to earnings? The danger with culling
whisper numbers from the online investing public at large is that the actual estimates then become almost
obsolete. The Web gives everyone the medium and opportunity to be an analyst and share their estimates. I'm
all for democracy and the sharing of information, but does a stock deserve to get slammed in after-hours trading
because it didn't meet the whisper number of someone going by the name of "ilovelucy" on Raging Bull?
My colleague, R. Scott Raynovich, wrote in his column this week that maybe we need a whisper whisper number
to predict what people will soon be whispering, before they whisper it. Well, for all you Web entrepreneurs out
there, I'm happy to report that whisperwhispernumber.com is an available domain name. Scoop it up before
Scott does.
CARELESS WHISPERS
Hey, why stop at earnings whispers? We should chatter aimlessly about every part of the income statement.
Revenuewhispers.com is, sadly, already taken, but grossmarginwhispers.com is available. So is
gainoninvestmentwhispers.com. And for those of you that really like to dig deep into those balance sheets,
there's accountsreceivablewhispers.com and accruedcompensationwhispers.com. Joy!
All sarcasm inside, the lack of a true earnings estimate is a serious problem for the market. The central tenet of
a successful investing strategy (note I said investing, not short-term trading) is finding stocks with earnings
momentum that are also trading at an attractive valuation.
Because the whole notion of value is predicated on what a company is expected to earn, it is critical that there be
some earnings standard. Otherwise value is a meaningless construct. With official estimates and whisper
numbers all floating around, what's to stop someone from calculating a whisper P/E based on all the
guesstimates out there?
If my barber's niece thinks that Yahoo (Nasdaq: YHOO) is going to blow away estimates the next few quarters
and post earnings for the year of $2.68 a share -- well ahead of the conservative Wall Street consensus of 45
cents -- then the whisper P/E is 50. Yahoo's a value stock now!
IGNORE THE CHATTER
It's a shame that short-term investors are making life crazy for those who have long-term horizons in mind.
My advice to people during earnings season, especially for investors who see their stocks get roiled after
reporting seemingly good results, is this: Ignore the chitchat about whispers and rumors.
If a company you own reported a solid quarter and seems to be on track to continue doing so in the future, don't
worry about how much it beat estimates by. I really hope that Steve Jobs has more important things on his mind
than figuring out a way to surpass the whisper numbers for Apple's next quarter.
Once again, it's time to hear what you think. I've got a huge backlog of email with suggestions for the Fish or Cut
Bait reader index, and, so far, I like what I see. Thanks for all the recommendations and if you haven't sent in
any picks already, feel free to do so now. I'm looking for companies that have the potential to be long-term
winners, even ones like Apple that had the audacity to miss its whisper number without giving the Street any
advance warning.
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