Psst … Here's How Your Company Will Do

You get lots of opportunities to see how your favorite sports teams are doing. Your beloved (insert baseball team name here) take the field 162 times during the regular season. You might wager on the games, but you've presumably got more money invested in stocks. Yet the managers of your companies take the field only four times per year: putting their talent on display in quarterly reports.

Thus it's with a lot of anticipation and sometimes excitement that investors await these revelations from companies. Indeed, some analysts on Wall Street are paid to estimate what those numbers will be. And when a company reports its earnings, investors draw conclusions based on whether the numbers beat or missed average analyst estimates.

Then there are the less publicized "whisper numbers," unofficial estimates that often circulate among wealthy investors and Wall Streeters. They, too, are used as yardsticks against which a company's reported earnings are evaluated.

Problems
But there are problems with this system. For starters, analysts often come up with their estimates based largely on information provided by the company. So a smart company might want to offer somewhat conservative guidance to analysts, in order to increase the chances it will deliver a positive earnings surprise and look compelling. You'll also sometimes see investors react positively when a company increases its guidance, that is, says it expects to make more in the current quarter than it had previously said.

Now that we're in the Sarbanes-Oxley era, companies are not permitted to selectively distribute information, so while some well-connected types might once have developed earnings estimates based on information others didn't get, that's less likely to happen now.

Smart investors shouldn't pay too much attention to estimates because even when a company beats them, its stock might slump, and vice versa. Check out these results from last week, for example:

Data: Motley Fool CAPS, Yahoo! Finance.

It really all depends on what investors are expecting. Meeting estimated earnings must have been better than investors anticipated for Stryker, as they sent shares up. And investors must have expected even more from Intuitive Surgical than Wall Street did, sending its shares down on good news, perhaps due to some signs of possible future weakness.

Learn what tens of thousands of investors expect of thousands of stocks in our Motley Fool CAPS community. You can add your own ratings and comments, too, all for free.