Loyal followers of the Chicago Cubs -- such as yours truly -- can be called many things, but "fair-weather fans" is most assuredly not one of them. For those who can't quote the movie Bull Durham by heart and are unable to explain the "infield fly rule," just know that the Cubs haven't won a World Series since William Howard Taft campaigned for president in 1908.
As such, we are slightly disheartened after being swept in a three-game series or losing yet another starting pitcher to the disabled list, but we understand that such short-term setbacks are virtually inevitable over the course of a grueling 162-game marathon.
On the whole, though, baseball fans are notorious for having a short-term outlook. After losing nine games in a difficult 10-game stretch earlier this month, the Yankees were roundly criticized and left for dead. Now, just two weeks later, they've won nine of their last 15 and are climbing back into contention.
Why do baseball fans give up on a perennial winning team because of one bad road trip or start discussing the playoff aspirations of a weak one that manages to string together a few good games? Why do they sometimes boo a career .350 hitter when he suffers through a 0-21 slump and scream for a curtain call from the .230 hitter who happens to hit a clutch home run?
The answer, to a certain extent, can be summed up in just seven words: "What have you done for me lately?" Too many people have become unduly focused on short-term trends and are unable to see anything from a long-term viewpoint. Unfortunately, this type of mentality is equally pervasive in the financial world.
Consider the bigger picture
Are investors really that much different? Don't we slam companies for announcing poor same-store sales figures one month -- which is tantamount to committing a couple of errors in one inning, not exactly something worth worrying over? And don't we praise others for reporting better-than-expected results in one quarter? This may warrant some polite applause, but probably not the standing ovation it sometimes deserves. For investors with supposedly long-term perspectives, do we really believe that such fleeting events will ultimately have much bearing on a stock's potential over the next decade?
Apparently we do. Why else would a company's guidance be picked apart and scrutinized for clues as if it were an Alan Greenspan testimony? Is there anything else on Wall Street that is so closely watched, so highly regarded, and -- in the long run -- so completely meaningless as corporate guidance? Certainly, management's comments can be insightful, possibly even revealing, but there are reasons why firms such as TheWashington Post
Staying on course
What's the common link between those three firms? Each is a significant holding of Warren Buffett's Berkshire Hathaway
What's wrong with guidance, you ask? Doesn't it let us know when a company strays off course? Actually, it does -- and therein lies the problem. On a long transoceanic journey, deviating a few miles off course is hardly cause for alarm. It's a long trip, after all, and sometimes unforeseen circumstances require nimble steering adjustments.
Unfortunately, anything but "full steam ahead" tends to draw a hostile reaction from Wall Street. When a firm issues its outlook for the next quarter -- or for the remainder of the fiscal year -- it forces investors to arbitrarily focus on near-term results, which must sometimes be sacrificed to attain long-range business goals.
One could make the argument that much of the volatility that rattles the markets day-to-day is the by-product of guidance and the overreaction it breeds. Those steering adjustments -- which we know as revisions -- inevitably lead to unnecessary fluctuation. How often have we seen a stock rewarded for issuing guidance a few pennies above analysts' consensus estimates, only to see the gain erased a few weeks later when the forecast is ratcheted downward?
Only changes in guidance -- with a little help from the headline-driven media -- can make us believe that a company that adjusts its projected earnings growth rate from 30% down to 20% is headed for a slowdown, while another that revises its outlook from 5% to 10% is suddenly on a roll. Isn't the first company still looking to grow at double the rate of the second? Heck, guidance can affect trading even when it remains unchanged. A company occasionally gets beaten up just because it reaffirmed its forecast when others in the sector were raising theirs.
Just as a movie preview offers only a brief glimpse of the coming film, an earnings preview can bear little resemblance to actual results. Either way, why jump to conclusions until you've seen the whole picture?
No good deed goes unpunished
Why do we sometimes see one company get pummeled for posting strong earnings growth one quarter, while another gains ground after reporting a steep decline? It's usually because everyone (based on guidance, of course) was looking for even sharper growth from the former and a bigger drop from the latter. Often, it's not the results themselves that matter but the difference between the actual and the expected that is most influential.
So while some companies -- I won't name names; you know who you are -- deliberately predict a low-ball outlook that can be topped, others are punished for being forthright, timely, and communicative with investors.
Last year, when children's-apparel retailer Children's Place
Does anyone believe there is not ample incentive in place for management to underpromise and overdeliver? So, all things considered, investors would be far better off without guidance, right? Wrong.
Talk is cheap
Notwithstanding the past several paragraphs, guidance is nothing more than information, and restricting information is never a good thing. Besides, removing management's yardstick from the picture would do nothing to cure the myopia of many investors. They would simply become even more reliant upon the estimates of analysts -- who, deprived of guidance, would likely be even further off the mark. Finally, there is the fear that reducing corporate disclosure would make it easier for companies to keep bad news hidden longer.
So, while it's nice for a company to bump its quarterly outlook up by a penny, I'd rather see its dividend raised by a penny instead. Not only will it go straight where it counts -- my bottom line -- but also the rationale behind the decision probably reflects confidence extending far beyond the next three-month checkpoint. While guidance is routinely revised downward, it is much more difficult to cut back dividend payments without sending up red flags. Furthermore, studies have confirmed that dividend increases have historically been a reliable indicator of stronger earnings ahead.
I wouldn't get too caught up in Johnson & Johnson's
A few more increases and the stock may do more than just catch the eye of Motley Fool Income Investor analyst Mathew Emmert. While Johnson & Johnson is on the radar screen, its 1.8% yield doesn't have quite enough kick to earn it a spot among the Income Investor ranks -- which sport a juicy 4.6% average yield. However, like most Income Investor recommendations (and dividend-paying stocks in general), Johnson & Johnson has had little trouble outpacing the S&P 500 over the past year. In fact, during the past decade, it has rewarded its owners with an average total return of 16.8% per year -- topping the S&P by more than 6% annually.
In short, rather than keying on guidance, learn more about the assumptions that underlie the numbers. Are they likely to change abruptly, or continue for the foreseeable future? Is an unexpected revision the result of a temporary aberration or a sign of things to come? Above all, don't let the transitory, short-term events of today distort your opinion of where the company is headed tomorrow.
By the way, the Cubs won last night.
To view Mathew's almost four dozen favorite income stocks, join the ship of dividend-loving Fools with a free 30-day trial of Income Investor. There's no obligation to subscribe, and a trial includes access to all back issues and previous picks, mid-month reports, current risk-adjusted values, and the Income Investor discussion boards, where Mathew posts regularly and where hordes of like-minded investors share wisdom, ideas, and analysis. Click here to learn more.
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