Do companies manage earnings? Some do. It's why free cash flow is often heralded as the better indicator of financial improvement. However, no matter how you count your beans, they can be stretched only so far to hit a particular number. That's why companies that beat earnings -- consistently -- usually deserve the praise.
Analysts are smart. Yet when they get perpetually outsmarted by certain companies, it's a sign that they truly don't understand the earnings potential at play. That may present golden opportunities for individual investors.
Let's take a closer look at a few of the companies that humbled the prognosticators this past week.
We'll start with Lennar
This does not mean that it will end badly for these companies. Lennar, for instance, closed out the quarter with a healthy 36% spike in backlogged orders. These are homes that will be handed over to new owners in the coming quarters at attractive prices, so Lennar's streak of trumping Wall Street's projections is likely to continue for another couple of quarters. That doesn't mean that it's safe to jump on to the most attractive homebuilder you can find, but it does mean that the bursting of the real estate bubble may not be the doomsday event that some worrywarts fear.
In Lehman's case, the improvement was due to double-digit gains in merger advisory fees, underwriting revenues, and trading revenues over last year's production. It's anyone's guess whether that will continue into 2006, since a stock market downturn would naturally suppress new stock offerings and trading activity. Then again, investment banks often provide the exact kind of investing play that prospective shareholders want, leveraging the potential upside of higher equity prices in the future.
So keep watching the companies that lap expectations. Over time, Foolish investors may find it a rewarding experience. That's the kind of surprise that market watchers relish in the Rule Breakers newsletter service. The average Rule Breaker selection has trounced the S&P 500's market return. Want in? Check out a 30-day trial subscription.
Either way, come back next Monday to learn about more stocks that blew the market away.
Longtime Fool contributor Rick Munarriz is a fan of toppers. He does not own shares in any of the companies mentioned in this story. The Foo l has a disclosure policy. He is also part of the Rule Breakers newsletter research team, seeking out tomorrow's ultimate growth stocks a day early.