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Can You Trust Market Analysts?

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  • Description

    Smartmoney columnist Jack Hough breaks down how we can tell what is a real 'upside earnings surprise.'

  • Duration 3:34
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A parent company -- Our nation back -- earning season -- -- so far this season more than 70% and the S&P 500 companies have reported better than expected earnings how is that possible.

So many of them are beating the street our next -- and because this system is flawed and it's sound make -- change joining us Jack how commas for Smart money.

You know listen -- -- you're saying we -- we the government numbers now we're saying we can't believe analysts numbers -- -- Before we can we can uncork the champagne -- to celebrate this fabulous -- -- -- let me let me ask you trivia question first of all how far back do you think we have to go to find a quarter.

When fewer than half of companies beat their earnings estimates.

And -- probably pretty -- is thirteen years ago CN -- years ago.

The average number of you know important companies -- be -- with two thirds is the average.

So you know clearly you can't be better than average all the time in corporate America is better than average all the time something must be wrong with the -- Is smarter than a lot of people and I I partially blame the standards of financial accounting -- -- for being behind -- April on this.

You couldn't find numbers just about anywhere you want and make it look pretty.

What you -- for you know it.

You can make our adjustments to your business short term short -- adjustments cut back on things like you know your research expenditures things like that find a few bucks if you need -- but more than that.

-- company you can signal to analyst what you think -- earnings going to be.

And it seems like everyone's low -- it seems like the company's global -- and -- -- banking analysts are doing its do right so.

You end up with quarter after quarter you know right now as you said 70% we have 70% of S&P 500 companies reported 70% of them have beaten earnings that missed it sounds like a blow -- quarter.

What we -- is that percent for seven straight months leading up.

-- they've -- -- season companies reduced their effort analyst reduce their estimates.

-- ended up -- estimate that we're lower -- -- -- -- that we could be the subject how could we tell which companies are really doing -- up.

Quite solid this arm study the couple of professors a look at -- -- it's it's a very simple approach.

The definition of an.

It when the stock price jumps after the earnings are reported how many times have you seen you talk about a company beating its numbers but the stock price either flat lines -- it goes down because investors saw something that in -- -- you take that combination of you know the upside earnings surprise.

We're also the stock price -- now we've got a real upside earnings surprise and it matters because investors were looking for operational momentum like -- buy -- companies that the first -- often we see great numbers and really rotten guidance and that kills the stock yeah I mean.

You know it it that's sort of if you're an investor and you're looking for this operational momentum.

Then why would you want to buy into a stock just because they beat that headline earnings number in the guidance lousy at it doesn't seem like things are gonna companies what.

I mean -- needle very short list of companies travelers insurance Seagate hard drives.

-- -- drilling and of course.

We saw apple how to blow out number and Boeing had -- number.

Those are five examples of stocks that jumped.

Much higher than the broad market was moving on the -- earnings -- what what do you look for Jack -- we're running out of time wanted to what are you looking for to get a true measure there's one number and then.

Well I.

I'd like to see an upside earnings surprise just as important an upside sales surprise -- you mentioned a moment got our earnings are very easy to manipulate not so sales much harder look for the combination of those two things earnings and sales and a stock price jump.

Those three together a very good -- Check out I think we should have real time earnings one of these days -- -- are -- gonna get real -- everything else we did.

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