Just because it comes from Wall Street, you shouldn't assume that analysts' investing guidance is worth following. Their professional credentials and spreadsheets full of fancy numbers may conceal serious conflicts of interest.

Analysts are still human -- at least, we hope so! -- and they can and do make mistakes. Worse still, consciously or unconsciously, they aren't necessarily looking out for you.

Investment banks and financial films often do business with the same companies their analysts evaluate and rate, making it less likely that those analysts will issue "sell" ratings on their employers' bread and butter. Indeed, the Bespoke Investment Group recently noted Wall Street analysts had "buy" ratings on 53% of the companies in the S&P 500, and "sell" ratings on just 5%. Is it really likely that only 25 companies out of 500 are worth selling?

Rose-colored glasses
Over the past 25 years, there have only been two five-year-rolling-average periods in which Wall Street analysts' earnings forecasts weren't overly optimistic, according to a recent article in The Globe and Mail. Since analysts often come up with their earnings estimates with a lot of help from the companies themselves, it's not surprising that their outlooks might tend to be a bit on the rosy side.

Below, I've highlighted several companies for which analysts have recently raised estimates for long-term expected earnings growth by at least 10%. While that may seem enticing, if you take a closer look, you can see reasons to approach these stocks with caution:

  • Goldman Sachs (NYSE: GS) owes much of its recent high returns on equity to high leverage, and the company is operating in a different, more closely examined arena these days. It has yet to prove that it can thrive in the new setting, and it's also prone to compensating its employees lavishly, siphoning away money that could otherwise boost its bottom line.
  • Wynn Resorts (Nasdaq: WYNN) is finding great success in its Macau operations. But times remain tougher for its casinos in Las Vegas.
  • Ford's (NYSE: F) turnaround has been impressive, with sales rising strongly in recent months. But even Toyota's fall from grace doesn't spare Ford from tough competition. Rival General Motors has been regaining its own footing, posting very strong sales numbers in May.
  • Morgan Stanley (NYSE: MS) is being investigated for possibly misleading investors regarding mortgage derivatives. It's also mired in uncertainty amid the possibility of new regulations for the financial industry.

Need further proof that analyst estimates aren't always what they're cracked up to be? Check your favorite companies' most recent earnings statements, and see how well their actual performance matched analysts' expectations. In most cases, you'll find significant differences, whether higher or lower, between Wall Street's prognostications and the final hard numbers.

However educated they may be, analysts' estimates are still just guesses in the end. In your quest for great investments, go ahead and see what analysts have to say. Just treat their numbers with a grain of salt, and be even more cautious about their ratings.