Monday, August 10, 2009

Using Whisper Numbers for Earnings Trades

There are a number of factors that affect post earnings price movement. Some are quantitative, some qualitative, some tangible, some intangible, some technical, and some fundamental. We consider 'investor expectations' to be the most influential and critical factor to understanding and anticipating post earnings price moves.

Let us first define what we mean by 'investor expectations'. Investors (professional, institutional, and individual) determine market direction. Some have more influence than others, but collectively, their expectations of stock price, stock direction, revenue, sales, etc. define the market. If investor expectations (real or perceived) of a company's future were bleak, the company stock price may suffer. If investor expectations (real or perceived) of a company's future were strong, the company stock price may surge.

It is the same with corporate earnings. When a company reports earnings that exceed investor expectations, the stock is rewarded. When a company reports earnings that fall short of investor expectations, the stock is punished. The simple fact is that expectations create surprises, surprises create volatility, and volatility creates opportunity.

How To Best Utilize Whisper Numbers: A number of investors have asked how to best utilize our data. First, in order to make the best trades investors need to be aware of as many factors as possible that can affect market moves. So aside from doing your own 'homework', it also means understanding investor expectations (whisper numbers). We'll restate something from a recent report: 'What we do know for sure is that company stock prices continue to react to beating or missing individual investor earnings expectations (whisper numbers) on a more consistent basis than analysts estimates.'

More often than not when a company misses the whisper number the stock is basically 'punished' and will see a decline in price over a one to thirty day period after earnings are released. And on average when a company beats the whisper the stock is rewarded and will see gains over a one to thirty day period after earnings are released. It is a simple process that should not be over thought.

Let's take a look at Research in Motion (RIMM) from the recent second quarter of 2009. They reported on April 3rd. Analysts expected 84 cents, investors had a whisper of 81 cents. If you expected (or hoped or guessed) that they would beat the low whisper you may have entered a long position prior to the release. You may just as well have expected (or hoped or guessed) that they would miss the expectations and enter a short position. Therein lies the 'risk'. You don't know whether or not they will beat or miss the expectations.

So how do you eliminate the additional risk of guessing or hoping the company will beat or miss the expectations? Simple, just wait until after earnings are released. RIMM reported earnings of 90 cents, topping both the analysts estimate and whisper number. Our data indicated that within thirty trading days following earnings, Research in Motion averages gains of 13% when they beat the whisper. If you waited until after the report you entered the market around 59. Within thirty trading days the stock was up 19% exceeding our expectation.

In fact, companies that exceed both the whisper number (from and the analysts estimate see a 2.5 times greater positive post earnings price move than companies that only exceed the analysts estimate but miss the whisper.

Does it always work this way? Absolutely not. But historically the data has proven itself more accurate in predicting stock movement than analysts estimates (which shows no definitive cause and effect).

Obviously knowing which companies are most likely to react to beating or missing the whisper number has added value. Having a target timeline, target price move, and advanced knowledge of this data with email alerts adds even more value.

You could spend years collecting and analyzing your own data, and coming up with an analysis of best 'whisper reactor' companies. (Anticipating price movement is not easy, and there can be no guesswork involved.)

An interesting website - does this analysis and puts together those companies most likely to see price volatility according to whether or not they beat or miss the whisper in a service called the Whisper Reactors.

Of course members of Richman's International Millionaire's Clubs may get the real inside scoop from corporate insiders who are also club members...