Sometimes beating the consensus earnings estimates isn’t enough, Cramer said Friday. Companies often have to beat the “high man” and “whisper,” too.
What the heck does that mean?
Analysts at sell-side firms like Bank of America, Goldman Sachs, Needham & Co. or Thomas Weisel Partners try to estimate how much a company, say Target or Dell , will make in a quarter. Once the buy side – hedge funds, mutual funds or pensions funds – gets the published results, they’re averaged together to get what’s known as a “consensus estimate.” This is the number in question when a company delivers a so-called better-than-expected quarter.
And “the surest correlation between the rise or fall of a stock,” Cramer said, “is whether or not it beats the earnings estimates.”
But there’s another number that can be more important. Estimates coming from the “ax,” or the best analyst covering a stock or sector, often take priority, especially if his or her projections are above everyone else. When this happens, the ax is then known as the “high man,” the name for anyone with the highest estimate on Wall Street. And a company’s stock can drop if the earnings don’t beat the high man – even if they topped the consensus estimate.
Example: The consensus estimate for Dell, which reports on Nov. 19, is 28 cents a share. But the ax, Sanford Bernstein’s Tony Sacconaghi, expects 29 cents. If Dell doesn’t beat Sacconaghi’s number, the stock “will most likely go down” the day after, Cramer said, unless it offers a “fantastic better-than-expected forecast” from next quarter’s consensus.
There possibly could be even more pressure on Dell. Analysts clustered in high-man territory may be whispering to their biggest clients – the hedge funds and mutual funds – that Dell should earn as much as 30 or 31 cents a share. If that’s the case, then the stock could dip if earnings don’t beat the consensus estimate, the high man and “the whisper,” as it’s known. In fact, expect the whole tech sector to get hit if Dell can’t measure up.
“That’s how important the whisper, the high man and the consensus are,” Cramer said, “to the way stocks are really valued.”
This process will play out in every one of the companies that report next week: Target, Salesforce.com , NetApp , Gap Stores and Dell. And high-multiple, high-growth Salesforce.com and NetApp could “get crushed,” Cramer said, if they don’t beat the high man and issue guidance that forces the high man to raise his own estimates for next year.
Regardless, though, all of these companies will be under pressure. And failure to live up to the Street’s expectations could affect more than just them.
“Because they are so important,” Cramer said, “all of their sectors might go down.”
Call Cramer: 1-800-743-CNBC
Questions for Cramer?
Questions, comments, suggestions for the Mad Money website? email@example.com