‘Whisper Numbers’ Heard Loud and Clear
Have you ever had this happen to you: The hot technology company you own meets analysts’ quarterly earnings estimate but its stock falls anyway?
If you’ve been in the market the last couple of years, chances are strong you’ve experienced this phenomenon at least once or twice. And the odds are equally strong that you only later found out why the stock dipped: Though the company met the official profit estimate put out by analysts, it fell short of their unofficial projection known as a whisper number.
Whisper numbers are rumors about upcoming earnings that swirl around Wall Street. Though they’ve only recently come to be called whisper numbers, they’ve existed in one form or another for years. After all, analysts and professional investors long have passed coveted information among themselves.
But because hot stocks these days can skyrocket or plummet instantly on the basis of just one quarter’s profit performance, whisper numbers now not only have a name but have emerged as an increasingly potent force in moving stock prices in the short-term.
As they have taken on greater prominence, whisper numbers have posed a special quandary for individual investors. Even for investors savvy enough to know of their existence, whisper numbers have been tough to get a hold of. What’s more, there was no proof that the whisper numbers individuals could get were accurate and could be relied on.
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Fortunately, there’s good news for small investors on both fronts: Thanks to the many investment site “bulletin boards” and “chat” rooms on the Internet, investors now have access to many whisper numbers. And a new academic study shows that, in the aggregate, those whisper estimates available to individual investors are more accurate than official estimates.
That doesn’t mean small investors are suddenly on par with Wall Street professionals, or that individuals should trade based on unsubstantiated information found in Internet chat rooms.
But it does mean that many whisper numbers on the Internet are legitimate. That’s important because individual investors are always hungry for information on their stocks, and they naturally want to know why a share price moves in the days leading up to an earnings report in the absence of official company news.
At the very least, a whisper earnings number on the Internet that diverges significantly from analysts’ published consensus earnings estimate may prompt an individual to double-check what’s going on at a company.
To understand fully what whisper numbers are and how they work, it’s important to dissect the way the earnings estimate game is played on Wall Street.
Companies, of course, tally their profits (or losses) every quarter, and report those numbers roughly two to six weeks after the end of the period. Because earnings are the fundamental force driving stock prices, analysts spend a lot of time projecting what the numbers will look like each quarter.
It’s not uncommon for stocks of companies that fall shy of expectations--by even a penny or two per share--to drop sharply. Fearing such a drubbing, many companies downplay their prospects each quarter so that analysts set estimates that the companies know they can reach, if not exceed.
Many experts believe analysts are willing accomplices in this game: After all, if one of their recommended stocks shoots up after beating estimates, clients are happy.
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Whisper numbers are a natural evolution of the estimate game: Because analysts know their numbers are probably off the mark as the quarter closes, they’ll figuratively whisper a more accurate projection to favored clients such as big mutual funds and pension funds. That gives clients time to buy a stock if it’s expected to beat the consensus number, or sell it if it’s likely to fall short.
Not surprisingly, whisper numbers are most common with volatile tech stocks whose earnings and share prices can gyrate wildly.
It’s critical to note that whisper numbers found on the Internet don’t come from analysts, at least not directly.
The very nature of whisper numbers, after all, presupposes that they’re shared among just a few people. No powerful analyst blares a whisper number on the Internet.
As David Gardner, co-founder of The Motley Fool online investment service, puts it: “It’s not a whisper as soon as it’s published on the Internet.”
So where do Internet whisper numbers come from, and can individuals trust them?
A new study from three university professors answers part of that question.
The researchers found that the whisper numbers they studied were more accurate than the consensus earnings estimates published by First Call Corp., one of the major earnings trackers.
The professors studied 943 whisper estimates and 3,546 First Call projections on 127 companies from January 1995 to May 1997. The researchers took whisper numbers from news stories and Internet bulletin boards.
As would be expected of estimates, both sets of numbers were off target in predicting a company’s final profit figure. But the whisper numbers were, on average, 8% closer to the actual numbers than the First Call estimates.
What’s more, whisper numbers had a bigger impact on stocks’ prices, indicating that investors placed more credence in them.
Say a company was expected to earn $1 a share according to the official First Call estimate, but actually earned $1.01. So the estimate was off by 1%. In cases of a 1% discrepancy, high or low, the study found that stocks, on average, moved 4% over and above the action of the broad market. That was over a two-day period--the day of the announcement and the following day.
What if the whisper number was off by 1%? Stocks made an even bigger move: 5% over and above the market’s action.
The pattern held up the wider the discrepancy became. A 2% error in the First Call number led to an 8% excess move in stocks, while a 2% whisper-number error caused a 10% gyration.
Note that those numbers reflect the stocks’ moves after earnings were reported. Whisper numbers also tend to move stocks before the profit announcement, so their total effect is even greater.
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The study didn’t answer every question an individual investor needs to address about whisper numbers. In fact, it didn’t even take a stab at the biggest one: Where, exactly, do whisper numbers on the Internet come from?
In their bulletin board postings on investment Web sites, some investors offering whisper numbers said they got them from their stock brokers, said Mark Bagnoli, a University of Michigan finance professor and coauthor of the whisper-number study. Theoretically, the whisper numbers filtered down to brokers from analysts.
Most investors, however, did not cite their sources.
Bagnoli freely acknowledges that it’s impossible to know where the numbers come from.
“These are unofficial sources,” Bagnoli said. “Nobody’s standing up and saying, ‘I’m putting my reputation behind this.’ Despite that, they’re more accurate.”
Even First Call concedes the whisper numbers have validity.
Stan Levine, First Call’s director of quantitative research, believes the whisper numbers may not come from analysts, but from brokers who don’t follow the companies as closely. He also thinks some could emanate from “someone with an ax to grind.”
But noting the results of the study, he adds: “People aren’t just pulling them out of the air. There is some information coming into the market that has some validity.”
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Others say they aren’t surprised that whisper numbers on the Internet prove to be reliable.
“It’s a rumor, no question about it. But there’s nothing sinister about it,” said Dick Green, chief executive of the investment service Briefing.com in Burlingame, Calif. Subscribers to Green’s Web site can find whisper numbers in the In Play and Tech Stocks sections.
Are whisper numbers worth making the effort to get?
For long-term investors who don’t care about near-term stock fluctuations, whisper numbers may not matter much.
“If you own a stock and hear the whisper numbers are good, you should sit back and watch the stock go up,” Green said.
Short-term traders, however, may well benefit by knowing that the whisper number for a particular stock is significantly different than the official earnings estimate, given the study’s finding that whisper numbers do move stocks notably.
Walter Hamilton can be reached by e-mail at walter.hamilton@latimes.com
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Where Whispers Become Screams
Individual investors should be wary of stock earnings estimate “whisper” numbers because it’s often impossible to determine their origin and accuracy. But for investors who want to track them, these World Wide Web sites offer bulletin boards or other investor forums where whisper estimates are exchanged:
Web Site: Addresses
Briefing.com: https://www.briefing.com
Motley Fool: https://www.fool.com
Silicon Investor: https://www.techstocks.com
Source: Times research
