Annual and quarterly estimates are just estimates. They may be educated estimates, but in reality they're just guesses made by really smart people. No one really knows, not even these really smart people, what the actual results are going to be until the quarter or year ends and all the numbers are in. Only then is the truth known.
Most analysts spend their days reading SEC documents, company press releases and past quarterly and annual reports to try to determine the financial aspects of a company's performance. They also review the strategic aspects of the economy as it relates to the specific company they're following. But in the end, it's the specific guidance provided by the companies themselves that often determines the analyst's projections. And probably rightfully so since I would expect that no one should know the company's financials any better than the management of the company. And when management puts out guidance, analysts listen.
Most analysts spend their days reading SEC documents, company press releases and past quarterly and annual reports to try to determine the financial aspects of a company's performance. They also review the strategic aspects of the economy as it relates to the specific company they're following. But in the end, it's the specific guidance provided by the companies themselves that often determines the analyst's projections. And probably rightfully so since I would expect that no one should know the company's financials any better than the management of the company. And when management puts out guidance, analysts listen.
When the analyst's estimates accurately predict the information in the company's quarterly or annual announcement, the price of the stock generally doesn't move much at all. And that's probably the way things should be. Estimates are revised and adjusted throughout the quarter and analysts guide investors toward the inherent value of the security. Estimates meet reality and the price of the stock is on par with its value.
Sometimes estimates and announcements are out of sync and the market reacts and it usually reacts immediately and at times violently. Sometimes the guidance is wrong, sometimes the estimates are wrong, and sometimes both are wrong. Regardless, the disparity between the two items can cause the price of the stock to move abruptly. If the announcement is higher than the estimates, the stock can open higher than the previous day's close. Alternatively, if the announcement is lower than the estimates, the stock can open lower than the previous day's close. Either way, it can present an outstanding investment opportunity for investors.
Sometimes estimates and announcements are out of sync and the market reacts and it usually reacts immediately and at times violently. Sometimes the guidance is wrong, sometimes the estimates are wrong, and sometimes both are wrong. Regardless, the disparity between the two items can cause the price of the stock to move abruptly. If the announcement is higher than the estimates, the stock can open higher than the previous day's close. Alternatively, if the announcement is lower than the estimates, the stock can open lower than the previous day's close. Either way, it can present an outstanding investment opportunity for investors.
Investors who consider themselves fundamental analysts will look at the historical data and try to determine if the rate of growth in revenues and earnings is changing causing the value of the company to change. They may also look for changes in the company's debt level, the number of shares outstanding, changes in the economy, changes is company expenses and profit margins, or any of a number of other accounting changes.
Investors that consider themselves technical analysts will look to the price chart to see if there's been any movement or changes to the various momentum indicators. He'll ask himself if the stock over bought or over sold? Is the stock reversing? Has it hit support or resistance levels? To this technical analyst the price chart will visually demonstrate what the fundamental analyst calls sentiment. Changes in the charts will often be referred to as changes in sentiment by the fundamentalists. And those are the changes in the sentiment or the price chart that create the opportunity for investors to make a lot of money.
It's why investors like the earning seasons.
Investors that consider themselves technical analysts will look to the price chart to see if there's been any movement or changes to the various momentum indicators. He'll ask himself if the stock over bought or over sold? Is the stock reversing? Has it hit support or resistance levels? To this technical analyst the price chart will visually demonstrate what the fundamental analyst calls sentiment. Changes in the charts will often be referred to as changes in sentiment by the fundamentalists. And those are the changes in the sentiment or the price chart that create the opportunity for investors to make a lot of money.
It's why investors like the earning seasons.
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