You are not alone. This week’s Wall Street Journal has an article on how analysts “sober up,” and bring their optimism down a notch as the actual earnings announcements from companies come due.
In each quarterly earnings announcement and the associated conference call, chief executives and chief financial officers discuss the results as well as their expectations for the quarter and year to come. It is that forward “guidance” that will get the analysts to move.
And they will move down. Every year like clockwork, analysts start out bizarrely optimistic about future results, then “walk down” their forecasts as the actual earnings announcement draws closer. [link]
Don’t laugh too loudly, however, because you might be subject to the same vacillations of human emotion.
“Analysts always tend to be more optimistic when they’re looking far ahead,” says Greg Harrison, a senior analyst at Thomson Reuters. “They don’t see the latest negative news as affecting the company that far out.” Then, around 90 days before the earnings announcement, analysts cut their forecasts in a collective rush.
Next, Mr. Harrison says, “as the [final announcement] approaches, reality sets in” and analysts cut their estimates again—often to a level below the final number the company will report.
Such farcical behavior is part of human nature. You probably think you are less likely to get cancer, be divorced or fail in your career than the average person will. So does just about everybody else, and we can’t all be right.
So when you are thinking hard about getting your revenue growth forecasts in there, take it with a grain of salt.
First off, you aren’t alone. Predicting the future isn’t easy!
Secondly, at least you aren’t subject to the kind of scrutiny these guys are. I mean, no one will be writing a Wall Street Journal article about how wrong your forecasts are, and how you quickly back-pedal to get your stories straight.