Why Estimate Trends Matter

My recent posts have emphasized that I need rising consensus estimates in order to be enthusiastic about either the market or individual stocks. Last week I noted how Apple's (AAPL) stock-price action has mirrored the reductions in its 2013 earnings-per-share estimate. A couple days before that, I reiterated my caution on the market as a whole due to the lack of upward revisions in the S&P 500 operating-earnings estimate. A few readers have emailed to ask why I care so much about revision trends, so now seems like a good time to explain. 

The estimate trend, per se, is not really what we are trying to discern. Rather, the revision trend is one proxy for what all investors are seeking: a mismatch between the expected earnings performance and what actually happens. (There are other proxies as well, the most famous being valuation. Low valuations usually equal low expectations.) If a company grows earnings at exactly the rate expected by the market, the stock should offer no more than a market return. Mr. Market will not pay anything to you, the investor, for simply riding the coattails of the market's research effort. In order to get paid, your work needs to uncover incorrect expectations -- and implicitly correct them. ...174 more words left in this article. To read them, just click below and try Real Money FREE for 14 days.

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