Whisper Numbers explained. They look at Internet Bulletin Boards! Good grief, they look at our estimates and report on them as whisper numbers? Wow!!!! We will have to remember this the next time we spreading manure on the stock field of dreams.
NW
The whispers that move Wall Street
If you listen to these unofficial barometers of company forecasts,
you can sometimes do better in the market - but be careful
By Andrew Marks
moneydaily.com
Many investors have noticed this earnings reporting season that
something odd is happening to the share prices of the high growth,
hi-tech stocks that many of them hold or trade. A company reports
earnings that meet or beat the official Wall Street estimate, but
the stock falls as though it had fallen short. Why?
Because they didn't meet the "whisper number." Unlike the official
estimate, which is derived from hard analysis of a company's
revenues and prospects, the whisper number is an unofficial,
unsubstantiated and unattributed forecast derived from rumors,
hints, and often, innuendo. As such, the whisper number often
carries more credibility on the Street because it is believed to
represent inside knowledge of forces that are going to affect the
company's fortunes.
In fact, according to a study to be published in a forthcoming
issue of the Journal of Accounting and Statistics, investors
sometimes can do better if they can hear the whispers.
Take Apple Computer (NASDAQ: AAPL). Prior to the October 14th
release of its latest quarterly earnings figures, the consensus
estimate -- as published and widely disseminated by the two major
earnings tracking firms IBES and First Call -- was for 49 cents.
The company handily beat those expectations, reporting a profit of
68 cents per share, yet its stock closed at 37.375, down 1.375 for
the day. The reason: many Wall Street pros say it's because it
didn't hit the "whisper number," which was somewhere between
74-to-81 cents. The same thing has happened to companies like
America Online (NYSE: AOL), Dell (NASDAQ: DELL), and Yahoo
(NASDAQ: YHOO), to name a few.
Why do whisper numbers matter? For one thing, both the expert
forecasters and the company leaders play an expectations game, the
companies trying to influence the forecasts downward so that their
earnings will look better by comparison. "Many companies like to
keep expectations lower than the number they really think they'll
hit," says S&P Equity Group analyst Scott Kessler. "That way,
their stocks get a nice bump up when they beat the official
estimate."
Forecasters, of course, try to account for that spin, and the
consensus estimate represents their best efforts to sort out the
difference. But the whisper circuit is often viewed as the
repository of the really smart analysis that more accurately
reflects the half-formed forces that will influence a company's
prospects and guide investor response.
The problem is that among other things, the whispers reflect the
gossip on financial bulletin boards, which may or may not be based
on sound information. But some of the information in the whisper
really is inside knowledge.
The investment pros Money Daily questioned on this subject
explained that many whisper numbers originate from the same
analysts who publish estimates below the whisper figure, and the
top company management that guides the analysts to their official
estimates. In other words, they are the inside leaks from the
folks who are playing the expectations game.
Susan Watts, a professor at Purdue University's Krannert School of
Management recently completed a study of whisper numbers, and says
they do matter, but mostly to larger investors. Says Watts: "We
found that whisper numbers are a better proxy for market
expectations and are more accurate than consensus numbers." Her
study, based on over 1,000 whisper numbers for 427 companies
spanning seven quarters between 1995 and 1997, also found that a
trading strategy based on whisper numbers made 1.68 percent more
than investing in the S&P 500 index.
Here's how it works: Analysts and other professionals who closely
follow a stock can often pick up strong hints from company
contacts that the numbers will end up being higher. "If I get off
the phone with a CFO and he's sounding very bullish as we're
approaching earnings season, I might take that as a strong
implication that the numbers will beat the estimate. There are SEC
laws preventing him from misleading me, even in such an oblique
way," Kessler observes.
Even under such circumstances, though, the analysts usually don't
raise their official estimates to meet their higher expectations
for two reasons:
First, they tend to stick to a company's official guidance because
they depend on management to supply them with up to the minute or
even advance information. "You're not going to be at the front of
that information line if the company doesn't like you," said one
analyst who declined to be identified.
Second, because it's often in the analyst's best interest to see
the numbers come out higher. "An analyst's primary task is to
recommend stocks. Bottom line is you're happy when a stock you've
called a strong buy beats expectations," explains Kessler.
This type of inside, on-the-QT information is hardly a new
phenomenon. What is new is that access to it has grown
incrementally, and for that we can thank -- or damn, depending on
your point of view -- the Web. The upside is that valuable
information that was once the exclusive domain of a handful of
people in the supposed know and their top, usually institutional,
clients, now leaks out through hundreds of message boards, chat
rooms, and websites, and is available to even the smallest
investor.
The downside to the wider access is that most investors have no
way of judging the accuracy of whisper numbers. Even worse, the
growing popularity of this measure is starting to undercut the
validity of the official forecasts and influence market response
in ways that can hurt smaller investors.
The small investor has two ways to deal with the whisper numbers:
First of all, you can try to get in on the information. But watch
out. Playing the insider can be dangerous when you're really not.
There are now at least three websites -- whispernumber.com,
EarningsWhispers.com, and investoroutlook.com -- that collect and
compile the numbers, and they're getting lots of attention.
EarningsWhispers.com claims it averaged 8,000 visits per day in
October, while whispernumber.com gets about 2,500 'hits' every
day.
Unfortunately, the whisper sites don't always agree, and the
estimates are hard to compare, being based on so many soft sources
of information. For instance, EarningsWhispers.com posts a whisper
number of 30 cents for Dell's earnings, scheduled to be announced
November 12, while whispernumber and investoroutlook say 32 cents.
The consensus number is 27 cents, according to IBES. In the Apple
case, EarningsWhispers carried a whisper number of 74 cents, while
whispernumber and investoroutlook both predicted 81. All three
were high.
The folks behind the sites are not too eager to explain such
failings, or to document the secret sources of their information
and hunches. And that is why small investors need to think twice
about trying to play the whisper game by listening in from a
distance.
Paul Hauk, whispernumber's president, declined to discuss how he
calculates the whisper number, but says he collects "about 90
percent" of his research data from Internet message boards.
Shannon Puls, a former consultant at KPMG Peat Marwick and a
partner at Webtools which runs EarningsWhisper.com, says his site
also mines the message boards for numbers, "But we give greater
weight to our contacts in the banking, computer, and
communications industries."
The best course for the small investor is to ignore the whispers.
Sure, they can have a pronounced short-term impact on share
prices, but unless you're a day trader or a market timer, one-or
two-day reactions shouldn't affect your decision-making and
ultimately shouldn't affect the performance of the shares. |
