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January 26, 1999

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Subject: Re: Analyst Reviews
Author: rustedSoul

Does anybody know if there is a routine time frame that analyst's try to do a "late check" of their prior numbers?? I have posted before in reply to those who expressed worries of Dell not making their numbers...and the price tanking. Dell is one of the big boys on the block and therefor will have more analst checking their progress than those of the Mid-cap, Small-cap category.

I have my own take on the role of analysts in the whole process of earnings estimates. I have come to the conclusion that if you are holding the stock (and not trading it), then these earnings estimates by themselves should not be a primary concern. I am more concerned about the specifics of its business: revenue growth, market expansion, earnings growth, margins, etc.

Nevertheless, the estimates should not be ignored either. By not releasing any information which would indicate an earnings miss before the miss actually occcured would be a major blow to investor confidence. We have not seen any information which would indicate anything other than "the sky is the limit" from M. Dell, so I take it as a tacit admition that the earnings estimate will be met.

"When a quality company like Dell consistently meets its earnings estimates, analysts need to come up with some way to make news."

This is all you really need to know about estimates. When a quality company like Dell consistently meets its earnings estimates, analysts need to come up with some way to make news. The typical way to do this is to "pile on" the momentum traders who sell the stock right after the earnings release. An analyst might say, "Well geeze, the price is down 5 percent. Looks like the market is not receptive to the latest earnings release". So they invent some reason, like "We expected 3 cents more based upon the whisper number". And if that won't work (because they met the "whisper number"), then they will invent another reason: "they didn't meet the super secret whisper number" (that was even higher).

Analysts, therefore, are not unbiased in this whole earnings estimate game because they look out for their own as well as other interests. Analysts are sometimes very receptive to help make an earnings report look good. They will lower their expectations (sometimes weeks or a month before) so the company can "beat them" (forget that fact that the earnings are down 75% from last year!)

For stocks, when do analysts get the ear of the most shareholders? Every quarter when the earnings are released. They know that millions of people are waiting for the report, judging the results. Perhaps many might take this "checkpoint" to make a decision about their position: sell, hold or buy more. Most analysts probably don't care either way what investors do, just as long as they create churn. After all how do the companies that the analysts represent make money?

"For stocks, when do analysts get the ear of the most shareholders? Every quarter when the earnings are released."

I absolutely love whats going on right now. Every major tech company (GTW, INTC, MSFT, etc) has reported blow-out/excellent earnings and the big guys are still trying to beat down all stocks! The latest earnings report which was very good news for tech was IBM. They reported strong earnings growth and good future prospects.

The big guys (supported by the analysts) are all desparately trying beat down the stocks now so they can buy lower. A week or two from now we will all be hearing how wonderful the tech sector is. Of course at that point they will have already bought in!

rustedSoul


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