Why Earnings ‘Expectations’ Are Nothing but Lies and BS

Last quarter, as earnings reports drew to a close, I read a great article about
how the beat the Street game is BS . I couldn't agree more and want to revisit
this idea now as we enter yet another quarterly earnings season. It's no
secret how Apple (NASDAQ: AAPL ) "surprises" Wall Street every quarter with
its earnings. In fact, if you followed InvestorPlace.com contributor Jaime
Dlugosch last quarter into the idea that Apple stock is "free money" around
earnings , you would have made a nice 5% profit in just a few trading days as
the stock soared after it's last report. Click to Enlarge But the phenomenon
is not limited to Apple. Last quarter, Mish Shedlock at Minyanville noted that
the majority of stocks have beaten the Street every year since the third quarter
of 1998 . Just check out the accompanying graphic (courtesy of Mish and
Minyanville) to see for yourself. I did a quick and dirty study of the
phenomemon to verify this trend, taking the a look at how the 30 Dow Jones
components performed against consensus earnings targets in each of their past
four quarterly reports. That is a sample of 30 stocks across 120 quarters.
Here's how things shook out: 3M (NYSE: MMM ) met earnings expectations once,
exceeded three times AT&T (NYSE: T ) met twice, exceeded twice Alcoa (NYSE: AA
) met once, exceeded three times. American Express (NYSE: AXP ) missed once,
exceeded three times Boeing (NYSE: BA ) exceeded all four times Bank of America
(NYSE: BAC ) missed twice, met once, exceeded once Caterpillar (NYSE: CAT )
missed once, exceeded three times Cisco (NASDAQ: CSCO ) exceeded all four times
Chevron (NYSE: CVX ) missed once, exceeded three times Coca-Cola (NYSE: KO )
missed once, met once, exceeded twice DuPont (NYSE: DD ) exceeded all four
times Disney (NYSE: DIS ) missed twice, exceeded twice General Electric (NYSE:
GE ) exceeded all four times Home Depot (NYSE: HD ) exceeded all four times
Hewlett-Packard (NYSE: HPQ ) exceeded all four times IBM (NYSE: IBM ) exceeded
all four times Intel (NASDAQ: INTC ) exceeded all four times Johnson & Johnson
(NYSE: JNJ ) met once, exceeded three times JPMorgan Chase (NYSE: JPM )
exceeded all four times Kraft (NYSE: KFT ) met once, exceeded three times
McDonald's (NYSE: MCD ) met once, exceeded three times Merck (NYSE: MRK )
met once, exceeded three times Microsoft (NASDAQ: MSFT ) exceeded all four
times Pfizer (NYSE: PFE ) exceeded all four times Procter & Gamble (NYSE: PG )
missed once, exceeded three times Travelers (NYSE: TRV ) missed once, exceeded
three times United Technologies (NYSE: UTX ) exceeded all four times Verizon
(NYSE: VZ ) missed once, exceeded three times Wal-Mart (NYSE: WMT ) met once,
exceeded three times Exxon Mobil (NYSE: XOM ) missed once, exceeded three times
TOTALS Out of 120 reports, 12 missed, 12 met, 96 exceeded Wrap your head around
that. There are dozens of Wall Street "experts" placing earnings targets on
each of these stocks, and this group manages to collectively underestimate these
companies a stunning 80% of the time! I guess we shouldn't be surprised. After
all, this is the way Wall Street works. God forbid you put a sell recommendation
on a stock and piss off management. What if they need help on a bond offering or
a merger deal from your company? Then you'd miss out on that seven- or
eight-figure fee. And if you're a small analyst firm, do you really want to
make a name for yourself by crying "foul" on some of the big boys? It's in
everyone's best interest to just smile and congratulate companies on having
such a bang-up quarter. That's fine for Wall Street insiders, but its all the
more reason why regular investors should completely ignore the whole idea of
earnings "expectations" or the thrill of "beating the Street." You
don't need a crystal ball to pick stocks that are going to beat earnings
forecasts. After all, this quick study indicates it happens 80% of the time. And
I'm going to go out on a limb and predict that Apple beats expectations yet
again in two weeks when it reports earnings Oct. 18. Jeff Reeves is the editor
of InvestorPlace.com. As of this writing, he did not own a position in any of
the aforementioned stocks. Write him at editor@investorplace.com , follow him on
Twitter via @JeffReevesIP and become a fan of InvestorPlace on Facebook .