Earnings season can be brutal. Stocks that miss their expected earnings can usually expect to be hammered by investors. These expected earnings are decided by a group of financial analysts and experts from brokerage firms. These brokerage firms have analysts that put out information on expected earnings. The consensus estimate comes from the average of all these predicted earnings. The consensus estimate will also include the variation between the highest and lowest prediction for earnings. If there is a huge difference in the two numbers, then it shows a high amount of variance in the stock.
When earnings finally do come out, stocks will fluctuate in price based on whether or not it actually met expectations. Even stocks that miss the earnings mark by a few cents can lose a lot of value in the market. This is because future earnings and profitability are usually already priced in to the stock’s market value. Therefore, when it misses earnings by even a small amount, analysts have to reevaluate future prospects for profit.
But there are other kinds of earnings that can make a huge difference in the price of a stock. They aren’t as well known, and that is completely intentional. I’m talking of course about whisper earnings.
What the Heck is a Whisper Earning?
A whisper earning is a response to the fact that consensus earnings aren’t always that accurate. Consensus estimates are widely available, but whisper earnings are not. Whisper earnings in the past, therefore, came from professionals on Wall Street, and were meant only for the wealthy clients from top brokerages. After Sarbanes-Oxley passed Congress, this was explicitly made illegal, and the punishments for insider trading were ramped up severely.
As a result, these traditional kinds of whisper earnings have been diminished to a degree. However, a new kind of whisper earnings has emerged, which comes from the expectations of general investors looking at shared information, past performance, and fundamental research. The earnings estimates produced by these investors spread like wildfire throughout the Wall Street community and become the de facto whisper earnings.
Whispers can be Loud in the Market
I mentioned earlier that investors tend to punish stocks that miss their targets in expected earnings reports. Sometimes, the same is true with whisper earnings expectations. For example, Deckers Outdoor (DECK) reported earnings of $2.69 per share on February 28, 2008. The results were 35 cents above the consensus earnings estimates of $2.34. The earnings whisper number though was $2.70. Therefore, shares of Deckers Outdoor were down by $10 the next day because they missed the whisper number by one single cent.
When trading, you always have to be aware of the effect of whisper earnings in the market. Sometimes they can be different from the consensus estimate, so what really matters is the source. If there are a great deal of very important and successful sources railing against a stock, then it may be important to pay attention to the earnings whispers. It’s impossible to predict the future, and it’s impossible to know exactly how much influence earnings whispers are going to have when the actual earnings report comes out. In most cases, all you can do is use your best judgment and hope for the best.
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