RELEVANCE OF ESTIMATES - GIVE IT NO RELEVANCE!

It is so baffling!

A company posts good returns but the market beats it down to pulp.

On the other hand, a banks asset quality might have actually deteriorated but the market seems unmindful and the stock revels in the green.

In both the cases, it is invariably the “estimates” which decide the fate of the stock.

When the returns are good and the stock still falls it is because, the earnings have come in “much below the estimates.” Now this could mean revenue or net profit or even the EBITDA Margin – anything which goes below the estimate is reason enough for the market to ignore the other metrics of the earnings.

And ditto for the other side – the asset quality deterioration is a given but because it did not fall as much as “estimates” the stock price surges.

That always puzzles the layman; its common sense, if the earnings are good the stock price will rise and if they have taken a beating, price will fall. So what is this play of “esitmates?”

Brokerages, funds and various brokers gives their own estimates of what they think should be the earnings and that is taken as a yardstick; if the earnings fall short, beat it down and if the earnings go beyond the yardstick, take it to new heights.

We see how the business channels or even websites, compare the results with their estimations and then go on to decide the fate of the stock. Or there are “polls” where a sample of people, we are never told how many in the sample size, give their estimation and that is taken as the yardstick.

How correct really are these polls, estimates? Actually speaking, they are nothing but mere expectations. When earnings go above or below the estimation, it merely means that they have gone wrong in their prediction. Instead they behave as though the results have gone awry while their calculation is like the unshakeable truth.

We have to see results for what they are, without comparing them with polls and estimates. Comparing numbers on a year-on-year or sequential is the way to assess, not some poll. These estimates and polls have no base; expectations are usually baseless.

So should on completely avoid the estimates? If you have a deep study of the company and the industry, you could. But at the same time, we could have a read-through to understand the perception of the market, what is on the investors’ minds and why? It can also be used to see how well analysts understand the drivers of a company’s performance.

In the end, your own analysis should come to the fore – more than meeting the various polls and estimates, you need to look at the overall financial health, order intakes. If you have conviction in the company, the moment the earnings’ gets beaten down because it was “ below estimates,” its time to buy!!!