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Clear Thoughts
Managing Expectations
| Analysts estimates are only estimates |
Many investors ask us about analyst estimates and how accurate they turn out versus the actual posted results of company earnings and other financials. Our answer to this question and how we handle the real results relates to another frequently asked question: how does Clear believe this market is different than two to five years ago?
Frankly, anyone can check www.barrons.com and discover just how inaccurately consensus analyst estimates predict actual results. In the old days, before regulations, analysts had a distinct advantage as they, investment bankers and corporate CFOs and CEOs were in much tighter communications. At that time, estimate accuracy frequently mirrored the strength of those relationships.
Congress and the SEC ruined that party and today we all share the same information at the same time. That equal access to information is one of the founding principles of our firm.
Many public companies issue revenue and earnings guidance, change guidance mid-quarter, and report actual numbers that meet expectations, disappoint or elate traders, portfolio managers, the media and investors.
Combining analyst estimates and public company guidance has created a parlor game played out in the media, especially when the speculation concerns high profile public companies.
When a public company reports earnings and has 300 million shares outstanding, missing earnings estimates by a penny may or may not be material to the overall health or growth prospects of the firm. To a mid or large cap firm with earnings in the hundreds of millions of dollars, being off by a margin of $3 million may be due to a small and non-material event. However, (and we mean a big however) do not tell this market about it. Managing expectations is a full-time job, staffed by entire investor relations departments at public companies.
Today both the media and the market expect firms to exceed expectations, demanding growth in revenue and earnings in the form of ever-increasing numbers. Average analyst estimates are seemingly arbitrary, and when there are relatively few analysts covering a firm, as is the case with over 50% of all public companies, the numbers game gets on even less firm ground.
We see stocks being hit from 2-15% in the first two hours of an open market when expectations are missed. More often than not, in less than 30 days the stock price level normalizes and any news to the upside is welcomed with open arms, often causing upward jumps in stock price.
From the Clear Asset Management perspective, when a company reports earnings our algorithms crunch the new numbers, establish the risk of a potential short-term drop, and evaluate what the numbers really mean to the public company. They then compare the company to other opportunities within the investment style. Sometimes our algorithms dictate that we will purchase more of the stock to maintain our weightings as we take advantage of a temporarily reduced stock price.
If we are not already owners of the stock, our algorithms may recognize a pattern of improving and strengthening fundamentals and, with a drop in price, calculate it as reasonably priced or under valued. In such a case, if the stock is ranked high enough we purchase it for our portfolios.
Our algorithms crunch the numbers, calculate risk factors, and recognize buying opportunities. As a result, Clear Asset Management invests without emotion, deliberately and with the discipline that has yielded our benchmark-beating results.
We do not get caught up in the moment. If we were like many other managers, we easily could lose our heads in the hysteria surrounding earnings season. Here, cooler heads prevail, as our investment process and computer-programmed algorithms provide us a logical and unemotional path to long-term out-performance.
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