Kurt Schacht, Managing Director, CFA Institute
What has become of the once-proud craft of stock analyst? We ought to be ashamed of the quarterly earnings spectacle that has come to define public perception of what constitutes sound investment analysis.
Analysis of quarterly results has become must-see TV. The financial news networks prominently display graphics each quarterly earnings day, showing what the company guided and what consensus analyst estimates are. This happens several times on earnings day, before the actual earnings are announced and then again after the formal release. All this is done, presumably, to keep us tuned in to the station: How accurate was the company with its guidance and how close was the analyst consensus? Inquiring minds want to know.
On-air analysts make earnings beats and misses sound very serious and what they signal for the short-term or long-term. Meanwhile, the retail audience is led to believe something must be up with those earnings surprises and hang on every word of the analyst’s diagnosis. Many investors I suspect, count this TV programming as their own version of disciplined research.
In truth it’s not all analysts who have made this circus. There are many varieties of financial analysts and plenty of real “pros” out there. But unfortunately, it is the circus of quarterly guidance and non-GAAP information that has become the public face of the investment research profession.
The latest dust-up around Apple’s quarterly earnings report is a reminder to us all of what passes for financial analysis on television. It is, by and large, an unfortunate farce.
On November 1 Apple (AAPL) announced its’ fourth quarter results and gave “guidance” on its expected first fiscal quarter revenues and earnings for the to be reported on January 29. It was a strong projection suggesting revenues between $89 billion and $93 billion for the first quarter, a substantial sequential increase from actual third quarter revenues of $53 billion and the corps of some 30-40 sell-side analysts that cover AAPL took it hook, line and sinker.
Fast forward January 2, 2019 when Apple pre-announced it would fall short and offered new, reduced guidance for the fourth quarter of ‘just’ $84 billion in revenues. The pre-announcement surprise stunned analysts and retail investors who panicked in what turned out to be one of the biggest one-day price drops in APPL history. Oh Apple, how thee hath forsaken us, they thought.
Armed with new company guidance and lowered expectations the analyst corps soldiered on with new assessments of the products and global demand, adjusting their forecasts accordingly. As analysts commiserated over the earnings surprise, gloominess loomed over APPL and in typical fashion, its suppliers. One might think analysts and investors would now be more skeptical of the spoon-fed guidance. Spoiler alert, they weren’t.
Game day arrived in late January. APPL reported its new quarterly numbers for the first fiscal quarter. Broadcast chyrons on the networks showed the new expected numbers for revenue and earnings guided by APPL just 27 days prior, alongside the consensus analyst estimate. They looked not just similar, but exactly the same. The earnings news hit after-market that day and apparently management’s reduced revenue guidance of $84 billion was now good news.
The first quarter results showed revenues of $84.3 billion and what was a horrible earnings miss just two week ago had become an earnings beat. No prize for guessing what happened to the stock price and the investors who bailed earlier in the month. The stock closed at $154.68 on January 29 and $165.25 on January 30, a gain of nearly 7%.
None of this is to take issue with Apple. The company acted in a transparent manner. Further, its fourth quarter revenues of $84.3 billion was just $300 million (0.4%) off their revised guidance on January 2. But the hype surrounding quarterly earnings which is designed for a television audience plays out in stock after stock. To say the professional analyst corps is sick of it, would be an understatement. In many ways it is a source of embarrassment for our capital markets.
Thorough fundamental analysis done correctly, is a detailed and often complex process. It is conducted on an ongoing basis and typically considers a vast range of macro and micro fundamentals. There are new forces impacting the economy and the prospects for individual company stocks nearly every day. Sound analysis is not just listening to the earnings call and swallowing company guidance. Nor is it simply soaking up the programming from CNBC or Fox Business. If only it were that easy.
If you are an investor, take some time to reflect on how you approach this process. Consider hiring a professional or at least appreciate that most of what you are seeing as an individual viewer is entertainment-driven by short-term data points. No one has a free pass to stock market riches. It is ok to enjoy the stock market pundits and to tune in the quarterly earnings show, just know it bears little resemblance to true financial analysis.