Why are analysts so wrong?

August 24, 2009

Is there something faulty about the way Wall Street analysts look at the companies they cover?  Once again, with the latest quarterly earnings season about to end, the analysts have been wrong. This time, they have been way off the board wrong.

With 480 of the Standard & Poor’s index of 500 leading companies having reported, Thomson Reuters research has found that some 73 percent came in better than expected. Only 9 percent of consensus projections were right and 19 percent came in worse than expected.

To a certain extent, this is not suprising. The consensus heading into the latest quarter was made gloomy by the state of the world economy and a lot of stock market losses over the past couple of years. You can be over-pessimistic just as easily as you can be over-optimistic.

But the longer-term track record for analysts is not that much better than the latest offerings. Over the past eight quarters, 63 percent of companies beat estimates, 11 percent matched and 26 percent missed estimates.

So, two questions. Why are they wrong? And if they are so wrong, should anyone pay attention to them?

17 comments

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jeremy, predicting the future of a stock or security is a tenous affair. unless you can calculte using the fundamental numbers and Visit the company to find out actual sales numbers and growth of orders, these analysts are mearly coddling their Clients and praying for good news. they make their money the old fashion way…it’s also known a CHURN or Buying and selling and or “advising”. If Psysics new the future then they’d surely invest… but they don’t! consider paying less attention to the number crunchers and use you gut instinct. Analysts are like weather people on TV… They can be 100% wrong every day in their forecasts and still keep their jobs..

Posted by Wilson | Report as abusive

Why are they wrong?
they are liars
And if they are so wrong, should anyone pay attention to them?
they are getting rich thru deception
they sould be in prisoned

Posted by bke | Report as abusive

The reason so many analyst estimates are off now-a-days is b/c corps are doing all they can to beat estimates via accounting tricks. There is so much incentive to do so because bonuses and options are usually tied into stock price, and the price is bound to rise when a pubco beats the street estimates. So the main statement of this article is pretty meaningless. BUT, if one were to track by how much pubcos were beating estimates and did a chart on that, I think that would really be a compelling story. I can think of a couple of major corps which, for some odd reason (*MASSIVE EYE ROLLING*) would continually beat estimates by a penny, just to say they beat estimates. Corporate earning statements are all doctored to look great at certain intervals and minimize tax liability.

Posted by the Shah | Report as abusive

Why do they get paid when they are consistently wrong? How is it possible that they didn’t know last year that the situation was deteriorating and sitting on sand? Why did anyone listen to them after that? And, considering that in many companies, the revenues are very low this year and their returns have been arbitrarily boosted using cost-cutting, layoffs and near destruction of their business models, when will the public actually know their real status? Will that be next year sometime or will the analysts still say everything is in the black when it isn’t?

- cricketdiane, 08-24-09

Are investors even concerned that the revenues aren’t there, that future revenues have been borrowed against and that with a lower level of consumer purchasing power, those future revenues will be depleted as well? Does it even matter? Aren’t their stock purchases evidently based on something else? It isn’t “confidence” – what is it? Do the investors profit and stock owners profit, even when a company goes into bankruptcy?

Maybe too much analysts are paid by dictating employers.
And no, with this kind of records no one should pay attention to their thing.

Gone wrong again! The reason cannot be pointed out any sole factor. The financial world is complicated with its alphas and betas. Well we could for certain look into the direction of the forecasting, basis of forecasting and many other external factors. Nevertheless one would not know the true story if the books of accounts and financial statements have been cooked.

Posted by Jackson Kuruvilla | Report as abusive

It depends what you mean by ‘wrong’.
Companies may decide to project a certain image of themselves through their reports, say for PR purpose, at a given point in time. Call it part of a special, ad hoc, image building, or re-building campaign.
Such trend would not, and probably could not be anticipated by analysts, who deal essentially with numbers and not hype.

Posted by yr | Report as abusive

I am a rookie in stock trading but I have observed the same. The stock that they downgrade goes down on the day they anounce the results of their research but it recovers and just does fine after a few days? Do I smell something fishy here? :-)

Posted by Hate Analysts | Report as abusive

By what metric do you decide if an analyst is right or wrong? What margin of error do you give analysts?

Having spent a good amount of time on Briefing, you would notice that a company can beat or miss estimates while being one penny off on a 2$-3$ basis. While I agree that analyst on average do not get it right, I find the 9% figure somewhat questionnable as a distintcion between “analysts are right” and “analysts are off” can be very subtle.

Posted by notananalyst | Report as abusive

The analysts that cover NYSE:UDR are obviously well paid by the company they cover. Prior to the 2Q Earnings Conference Call, we submitted questions from class-action members from California to all the usual UDR analysts. Since the “ordinary folk” were not allowed to ask questions, we implored the analysts to speak up on our behalf. (See http://www.udrfraud.com for more details) Shame on them. No one even came close. The questions asked by the analysts were the most inane, irrelevant and scripted questions David Messenger (UDR CFO) could come up with. Why can’t normal folks ask questions? Why are we relegated to the same tired questions over and over and over again?

For sceptics of pundits who haven’t seen the “Peter Schiff
video”: a pretty often watched video exists, a flashback
to news shows 06 / 07. It’s an example of pundits making
incredibly wrong forecasts and recommendations; almost a
must – see.
http://www.youtube.com/watch?v=2I0QN-FYk pw

Posted by JF | Report as abusive

my view is that these industry/sector analyst take market risk too lightly and ignore global macro factors

Posted by dvictr | Report as abusive

Economics is about looking at the past, and analysing the present. It has never been, nor has it claimed to be, a way to predict the future.

All it can do is determine current trends, based on the data available. If you use economic analysis for speculation purposes, and get burnt, then it was your own fault.

When this banking crisis began, the economists were on the horn immediately. Those who were smart listened, and got out before it got too bad.

For that matter, most economists knew this banking crisis was coming years ago. They just couldn’t say when the crunch would happen, which is why nobody listened to them.

Posted by Anon | Report as abusive

Is anyone surpised? The market is now driven by emotions, not fundamentals.

In one of my blog posts (click on my name) I ask why investors don’t question the relationship between analysts and companies more in-depthly.

We know that credit rating agencies overvalued certain financial products during the bubble economy of the past decade. Now think about this. When a company reports that it beat analyst expectations, it gets a big PR boost. Lately, beating analyst expectations is the silver lining that is letting corporations get away with massive losses and dreary forecasts. What do you think the average analyst is more worried about? His reputation among lowly investors? Or his reputation in the finance industry and his relationship with various corporations.

I’m seriously befuddled why, after what we’ve seen happen with CDOs and the credit rating agencies, this question isn’t being asked with greater seriousness?

LOL IF they knew what they were talking about they would all be on their yachts in the south of France. Dohh!

Posted by Dennis | Report as abusive

Good points CBFE. Anon, not sure that we should equate analysts to economists. I also have reservations about ‘Economics is about looking at the past, and analysing the present’. If that is the case, what does that achieve – throwing more rocks at the dark ?

Posted by Casper Lab | Report as abusive