Analysts’ Current Earnings Forecasts Accentuate Bad News
It may be the most persistent criticism leveled against stock analysts: excessive optimism. It’s widely perceived that they tend to be more upbeat about the companies they cover than the facts justify.
However, a new study finds that when it comes to what may be analysts’ most closely followed work product — forecasts of current-quarter company earnings — the opposite tendency actually prevails.
“Analysts revise current earnings more often for bad than for good news,” says the report. “The analyst tends to omit positive news from current quarterly earnings forecasts while revising such forecasts [downward] in response to negative news.”
That’s not to suggest, though, that positive developments get discarded. It’s just that analysts often convey it in other ways than by raising their estimates of current earnings, according to the study’s authors, Zachary Kaplan and Charles Ham of Washington University of St. Louis and Philip Berger of the University of Chicago.
One alternate way is by revising stock-price targets upward. Another is by raising estimates of company earnings in future quarters. A third is simply through expressions of optimism about earnings without an outright revision.
Based on data covering the activity of 8,860 analysts in 71 quarters, the researchers report the likelihood of an upward revision of current earnings estimates to be about 13%, and that of a downward revision to be about 19.5%.
But when it came to revisions of stock-price targets and future-earnings estimates, the prevalence was the reverse: a 9.3% likelihood of downward revisions for the two items together, and an 11.2% chance of upward revisions.
In addition, a separate survey of brokerages’ reports to clients found that, without changing their forecasts, analysts did not refrain from explicitly predicting firms would miss or beat them, and that “beat” predictions outnumbered “miss” predictions by about 30%.
What accounts for these patterns? The professors surmise that in large part, it’s a desire to please top managers at the companies analysts cover. In keeping earnings forecasts low by not incorporating positive developments, analysts “cater to managers’ preferences for a walked-down [earnings] forecast pattern.”
The pattern the authors document, however, includes avoidance of walking up rather than only walking down. Non-earnings forecast signals are more prevalent for positive news than negative news, consistent with analysts responding to incentives to issue earnings forecasts managers will meet or beat.
In this regard, the study’s findings complement earlier research by other academics in which analysts were surveyed about their interactions with the firms they covered and reported feeling more pressure to lower earnings forecasts than to boost them.
The new paper suggests that such pressure from corporate managers can be very effective.
The practice of reporting positive news without incorporating it into more widely circulated earnings forecasts can, the study suggests, provide a significant advantage to brokerage clients over investors who don’t have access to analysts’ reports.
For example, on average an analyst’s upwardly revised stock-price target boosts by as much as 4.2% (depending on how it’s calculated) the likelihood that a company will beat the analyst’s on-the-record forecast of current quarterly earnings. This can provide a significant edge to the recipient of the optimistic price-target revision over an investor who knows only the unaltered earnings forecasts.
Why bother with this complex channeling of information? Why not simply raise earnings forecasts when there is good news as frequently as forecasts are lowered when there is bad news? Or, if good news does not justify raising an earnings forecast, why disseminate it at all?
In analysts’ role as financial intermediaries, the professors write, they serve multiple stakeholders who can have possibly conflicting demands for bias and precision. For instance, managers prefer beatable forecasts while investors demand accurate information. The analysis suggests that one way analysts may manage these conflicting demands is by “varying the forecasts into which they incorporate news.”
“Analysts convey optimism about current earnings in alternate ways that enable them to be of service to clients, whom they care about, and at the same time to avoid displeasing corporate managers, whom they also care about,” says Kaplan.
“True,” he adds, “providing information in these alternate ways excludes a broader public of non-clients. But given the complexity of analysts’ work and the general acceptance that brokerage is a business and not a public service, this would seem to be inevitable.”
Kaplan suggests, though, that the study does offer a lesson of potential importance to that broader public — namely, that widely circulated earnings forecasts, notwithstanding their value, may not be as informative as many people think.
The research draws on information from the Institutional Brokerage Data System, a major source of corporate and brokerage financial data. The study, entitled “Do Analysts Say Anything About Earnings Without Revising Their Earnings Forecasts?” appears in the March issue of The Accounting Review, a peer-reviewed journal published by the American Accounting Association.
How to Make Hot Sauce: Spicy Perfection in a Homemade Recipe
What makes a taco tantalizing, a plate of pad Thai pure peanut-influence perfection, or an omelet um. .. egg-cellent indeed? Hot sauce! That’s what. Adding just the right amount of liquid spice to your meal helps accentuate all the other flavors therein, bringing out the best in each ingredient in the dish. A fine hot sauce is like the punctuation of a great sentence — use just the right amount, and the intended tone and ideas will be transferred with grace. (Use, too much, and — then — the whole thing … is … no good!!)
If the mere mention of capsaicin sets off your Pavlovian reflex, then you have come to the right place. Those of us who have a passion for hot sauce know that almost no food is complete without it (exceptions include ice cream and a limited number of fruits … but who knows what the future holds for our palates?).
But how to choose the perfect hot sauce when there are so many available? Do you stick with hipster ketchup Sriracha? Add a bit of Aztec’s Revenge? Turn to timeless Tabasco? Or do you cast off the bonds of cowardice and boldly march ahead, turning left down the hallway, stopping briefly to check the pile of mail left on the sideboard in the living room, and then entering the kitchen to make your own homemade hot sauce? Yeah, you do!
Fortunately, as it turns out, making homemade hot sauce is laughably easy. The best thing about the basic recipe I’ll share today is that you can alter it in countless ways. You can add a chunk of fresh ginger, a splash of soy sauce, some brown sugar, change up the peppers, and so forth — what you have here is a recipe for homemade hot sauce that will taste great just like it is, but is, in fact, a jumping off point for your own journey exploration and discovery. Think of yourself as the Hernán Cortés of hot sauce making, but without being a murderous bastard.
Randy Fath
Ingredients:
Pretty simple, right? Peppers, onion, garlic, vinegar, and some fabulously basic spices. Now that we have our basic recipe ready, let’s talk about how we actually make this stuff.
Method:
There! You just made homemade hot sauce! And the entire process takes about a half hour of hands-on work and only a week of waiting around. Is it worth it? Taste the spicy goodness and you tell me. Or we can cut the chase and I’ll tell you: it is.
ACCENTUATE LIMITED – Publication of Broad-Based Black Economic Empowerment Annual Compliance Report
ACE 201902180029APublication of Broad-Based Black Economic Empowerment Annual Compliance Report
Accentuate Limited(Incorporated in the Republic of South Africa)(Registration number 2004/029691/06)JSE Share code: ACE ISIN: ZAE000115986(‘Accentuate’ or ‘the Company’)
PUBLICATION OF BROAD-BASED BLACK ECONOMIC EMPOWERMENT ANNUAL COMPLIANCE REPORT
Shareholders are advised that in accordance with paragraph 16.21 (g) and Appendix 1 to Section 11 ofthe JSE Listings Requirements, the Company’s updated annual compliance report in terms of section13G (2) of the Broad-Based Black Economic Empowerment Amendment Act 46 of 2013, has beenpublished and is available on the company’s website, www.accentuateltd.co.za.
18 February 2019JohannesburgDesignated Adviser: Bridge Capital Advisors Proprietary Limited
Date: 18/02/2019 01:40:00 Produced by the JSE SENS Department. The SENS service is an information dissemination service administered by the JSE Limited (‘JSE’).The JSE does not, whether expressly, tacitly or implicitly, represent, warrant or in any way guarantee the truth, accuracy or completeness ofthe information published on SENS. The JSE, their officers, employees and agents accept no liability for (or in respect of) any direct,indirect, incidental or consequential loss or damage of any kind or nature, howsoever arising, from the use of SENS or the use of, or reliance on,information disseminated through SENS.
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