Investors make it their mission to accurately anticipate a stock's performance, using forecasting models, technical indicators, fundamental analysis and so on. But for all their efforts, they can't possibly see into a company's future -- and as a result, there's usually a discrepancy between their conjectures and the numbers borne out by reality.
Sometimes, a stock's actual performance varies widely from its consensus estimates, the aggregate of investor predictions for the company's outlook -- and these so-called "surprises" often continue to confound investors time and time again.
Which is itself something of a surprise -- you'd think that investors would learn from their previous mistakes, and adjust their expectations upwards if a company announces a positive piece of news.
But investor logic is often overridden by an irrational impulse to cling to their original estimates, in a psychological phenomenon known as "anchoring."
Studies have found that when people are asked to make quantitative estimates, they're strongly influenced by the item's previous value. Essentially, numbers have a curious tendency to get stuck in our heads, making it difficult for us to break away from them -- hence the reason a salesman begins the negotiation at a high "anchor" price and works his way down, fooling the consumer into believing that the lower price is a good value.
This anchoring effect sometimes causes investors to under-react to new information announced by companies. If investors are overconfident and attached to their most recent estimate, they may be reluctant to give as much weight as they should to the new information in the press.
Given what we know about the anchoring effect, the following list might offer an interesting starting point for your own analysis. All of these companies have been dragged down by excessive pessimism over recent months. In addition, all of these companies have recently announced new management changes.
A new broom sweeps clean, which raises an interesting question: Have these bearish investors properly incorporated the significance of these new management changes? Or are they still anchored to their previous bearish opinions? (Click here to access free, interactive tools to analyze these ideas.)
1. Avon Products (NYSE: AVP ) is a leading manufacturer and marketer of beauty products worldwide. The company recently announced, Vice Chairman, Chuck Cramb as the new leader of their developed markets group. Additionally, Avon announced the dismissal of senior executives involved in emerging markets groups covering regions such as Latin America and the Asia-Pacific region.
Sentiment Analysis: Options traders seem to be positioning for near-term weakness in AVP, and they've been buying protection against possible losses. The company's put/call ratio, which measures open interest in options contracts, increased from 0.55 to 0.65 between 03/10/11 and 03/23/11 (a change of 18.18%). In addition, institutional investors appear to be bearish on the stock's outlook, reducing their holdings by -11.0M shares during the current quarter (representing about 2.57% of the company's float).
2. Hot Topic (Nasdaq: HOTT ) is a specialty retailer that operates in malls and over the web in the United States. Its target market is young men and women between the ages of 12 and 22. The company recently announced the departure of Betsy McLaughlin as its Chief Executive Officer and appointed Lisa Harper, a member of the company's board of directors, as her successor.
Sentiment Analysis: Institutional investors appear to be bearish on the stock's outlook, reducing their holdings by -1.6M shares during the current quarter (representing about 3.95% of the company's float).
3. Kenneth Cole Productions (NYSE: KCP ) is an internationally recognized designer and retailer of a range of fashion apparel, footwear and handbags. The company also generates revenues through license agreements of its portfolio of brand names. In recent weeks, Chief Executive Officer Jill Granoff agreed to leave her position as chief executive officer of the company, as well as her seat on the company's board. Kenneth Cole, chairman and chief creative officer, will act as Interim Chief Executive Officer. Paul Blum, who was with the company for 15 years and served as president from 2002 to 2006, has agreed to return to the company and assume the role of vice chairman.
Sentiment Analysis: Analysts have turned bearish on KCP over the last month. The mean rating, sourced from a Reuters survey, changed from 1.5 to 1.67 since 02/21/11 (ratings close to 1 = Strong Buy, while ratings close to 5 = Strong Sell). In addition, mutual fund investors were net sellers of 240,200 shares during the previous quarter (represents about 2.51% of the company's float)
4. Leap Wireless International (Nasdaq: LEAP ) is a wireless service provider in the United States that operates under the Cricket brand name. Pentwater Capital Management, LEAP's fifth-largest institutional investor with holdings of about 5%, announced efforts to shake up the company's board of directors claiming years of management mistakes. Pentwater will be nominating three directors in the upcoming annual shareholder meeting. After this announcement was made, LEAP shares rose by 10%.
Sentiment Analysis: During the previous quarter, institutional investors were net sellers of 4,200,000 shares (represents about 6.8% of the company's float)
Interactive Chart: Press Play to compare changes in analyst ratings over the last two years for the stocks mentioned above. Analyst ratings sourced from Zacks Investment Research. Note: The numbers on top of items represent the forward P/E ratio, if available.
Kapitall's Eben Esterhuizen and Alicia Sellitti do not own shares of any companies mentioned.
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