Stocks & Commodities V. 32:7 (61-62): Wall Streetís Biased Estimates by Gideon Vigderhous, PhD

Stocks & Commodities V. 32:7 (61-62): Wall Streetís Biased Estimates by Gideon Vigderhous, PhD
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Wall Streetís Biased Estimates by Gideon Vigderhous, PhD

Earnings Talk

Does Wall Street show a systematic bias when estimating earnings per share (EPS) when compared to actual EPS? Is underestimating the norm? Using forecast models based on time series analysis will give you a weighted average of the EPS so you know how to hedge your portfolio during earnings season.

A critical time for every stock traded on the stock exchanges is when corporate earnings are announced. Stock prices are sensitive to earnings results when evaluated in light of Wall Streetís expectations, also known as the consensus estimate. Stock prices can gain or lose as much as 5Ė20% of their value in one day when faced with either missed Wall Street estimates or beaten Wall Street estimates.


Analysis of 1,333 companies that reported earnings in 2011 indicates that 92.5% of them received a positive EPS estimate by Wall Street analysts, and 65% of those companies indicated they were able to beat the Wall Street estimate. Those could be described as surprise earnings. Meanwhile, 7.9% of the companies met Wall Streetís estimate, and the balance (27%) fell below Wall Streetís estimate with an average loss of 11 cents below the estimate.

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