Earnings Season & Analyst Stress

In the next few weeks you may be seeing some erratic changes in share prices.  These changes will be, in most cases, a result of company earnings reports and the actions of analysts following discussions with the company’s management.  These one-hour long telephone conversations, known in the industry as quarterly conference calls, can be very stressful for the analysts that participate.  An hour-long conference call, in which an analyst might only ask one or two questions of the company CEO or CFO at the end, may not sound stressful.   But the person they may be answering to is a portfolio manager who owns fifty or so companies, and for them that one hour conference call is actually fifty extra hours of work on top of the normal work load.  Not to mention these analysts usually follow many companies, are expected to have reviewed the new quarterly reports, decipher any hidden messages contained within, make new earnings estimates or reaffirm the old, along with updating buy, hold, or sell recommendations on each company. 

Therein lies the problem.  Having to make or reaffirm new earnings estimates, and recommend any change in ratings has very real consequences.  In a perfect world each analyst would use their training, experience and cold hard reasoning, independent of all other sources, to create their personal estimates.  But just like you, an analyst is human, and the human being has learned to take short cuts.  Most of these short cuts push towards our desire to be liked, and most importantly, not to be the only “dope” in the room. 

The best way not to be the “dope” is to go along with the crowd.  Before going out on a limb and making a change, which could even be contrary to the rest of the crowd, an analyst will first review the actions of all of the other analysts following the same company.  To test this, just listen to the conference call of your favorite company.  When it’s time for questions listen to the analysts.  They act as if they know the company better than the executives fielding the questions.  Most questions will be similar sounding.  In fact, catch words such as “color” or “margins” will stand out and be used by multiple analysts.  Every once in a while you will hear a question that is completely different.  When this odd questioned is asked, you can hear the muffled chuckling, or the dead silence of the other analysts and executives on the call.  If you can hear it, then the person asking the question can hear it, and he or she will quickly adopt the proper analyst role asking the stock follow up, “Will you add some color to that”?

Stock prices will ultimately reflect the growth of shareholder equity.  Quarterly earnings are just one very small step in the long-term accumulation or destruction of shareholder wealth.  If we can accept this and recognize that the immediate reaction to quarterly earnings is driven by “group think” then we can individually concentrate on longer term results.