The Consensus, the Whisper Number, and the Estimize

July 9, 2012 2:14 PM EDT
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Macro concerns aside, earnings are the true driver of stock prices. How much a company is earning, how fast the earnings are growing, and what an investor is willing to pay for those earnings should determine a stock price. Quarterly earnings, while short-term focused, are an important report card that provide investors insight into whether the company is meeting goals. Each quarter, sell-side analysts forecast expected earnings for a company based on various factors including: company guidance, models, channel checks and other research metrics. The average of all the analysts covering a specific company is put together to form the consensus. When quarterly reports are released, the company's actual earnings number is compared to the consensus. The company may "beat" the consensus or "miss" it. The results can have a dramatic impact on the stock price.

Taking it a step further, since the invention of the consensus, investors have always had their own idea of what the company should report - above or below the consensus. The investor may be using factors beyond those of the sell-side analyst, including proprietary research, supplier and/or rival trends, or more real-time data. Alternatively, investors may simply look at past beat rates and extrapolate future results.

In some instances, sell-side analysts seem to adhere to an unspoken code to give estimates which under-shoot expected quarterly figures. A perfect example of this is Apple (Nasdaq: AAPL). Each quarter the company beats the consensus by more than 20 percent, yet no analysts ever get ahead of the company. It's pretty obvious the sell-side firms are holding back.

An investor's expectation above and beyond the consensus number is considered the "whisper number." In many cases, companies have to beat this number in order for the quarter to be considered a success. In the above example, it would be considered a surprise if Apple didn't beat the consensus number by 20 percent since the company always does.

So there is the consensus, the whisper number, and, now taking the whisper number to the next level, Estimize.

Estimize is a New York-based start-up that offers a social, interactive and real-time platform to form a new consensus from some of the best minds on the Street. Inputs come from traders, buy-side analysts and other smart independent analysts. The numbers these investors are coming up with have proven successful quarter-after-quarter: data from the company shows a success rate of 64 percent, or almost two-thirds correct for instances with four or more estimates.

As Wall Street kicks-off the second-quarter earnings season tonight with Alcoa (NYSE: AA), is proud to announce that our EPS Insider has integrated the Estimize consensus into our platform - allowing all to view, compare and participate in this growing trend.

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