Trader Talk

Analyst Estimates: So Just How Good Are They?

Ever wonder how good analyst estimates are? The Street watches them all the time, because...uh, there's no other game in town when it comes to projecting estimates.

The general belief among veteran traders and stock market reporters (myself included) is that the analysts tend to overinflate the earnings estimates of the companies they cover. They do this because being excessively bearish usually guarantees little if any access to the company, and the analysts assume that being more bullish will help their company provide financial services to the company they cover.

Now, along comes a study from Penn State professors Patrick Cusatis and M. Randall Woolridge which concludes (surprise!) that "long-term EPS growth rate projections are consistently overly-optimistic." From 1984 to 2006, the analysts' average one-year per-share earnings expectations were for 13.8 percent growth; average actual growth rate was 9.8 percent.

The only time analysts under-estimate earnings growth rates is for short periods of earnings recoveries after economic recessions, and in that case they are too bearish. That, by the way, is about where we are right now.

Questions?  Comments?