The Gap between the Numbers and Analysts’ Expectations


hp drops
I’m always very interested to follow earnings season since it’s the perfect time to make sure that each stock I own is doing well. Quarterly results help me to keep up with all stocks and the management teams’ comments, often published by the CEO, give additional information on what happened and where the company is going. It’s not only a matter of numbers, it’s also a matter of strategy; business models.

Now that I run 12 virtual portfolios for Dividend Stocks Rock, I simultaneously follow 45 to 50 companies. Let’s just say that the month of April was quite busy for me and I’m currently finishing the review of all the results. The fact I’m covering so many stocks at the same time allowed me to identify several trends. An interesting trend amongst others was to realize how analysts’ expectations drive the market.

The Stock Goes Where the Analysts Call The Shot

As a dividend investor, I focus on companies generating cash flow today and that will generate cash flow in the future. It is a simplistic vision of investing but it doesn’t have to be complicated to be efficient. I will follow trends in revenues (sales) and earnings (EPS) over the past three and five years. I will also combine these metrics with the company’s dividend payout management. This is why I follow the dividend growth and dividend payout. The combination of these metrics will tell me if a company is on the right track to make good business and generate enough cash flow. Then, I look at what the company is doing with its cash flow. I’m more interested in a company sharing its profit with investors through dividend payouts or stock buybacks than spending in mergers & acquisitions, R&D or marketing. These last three types of expenses do matter for the long term success of the company, but I want to make sure that the dividend payout is not left out of the equation.

I’m well aware that I don’t see stocks as analysts do. This is why the market goes up and down faster than we can stand. If the company doesn’t deliver what analysts expect, regardless if it’s positive results or not, the stock will get hurt.

The best example I can see is Helmerich & Payne (HP) which published EPS up by 14% compared to last year and revenues up by 6.5%. This was an all time record figure for revenues. The CEO also announced HP was doing well and continued to experience strong demand. In the same call, he also announced that HP entered in an agreement with 5 more exploration and production companies. My understanding: HP will continue to pay and increase its dividend.

The result on the market?

A 6% drop within one market session. Analysts expected more, they weren’t happy; they got rid of the stock like a rock stuck in your shoe. Does it mean you shouldn’t buy the stock or you even sell it? I hold on to my position.

Why? You have to understand why analysts are not managing your portfolio but theirs. There is hype around HP as the stock is +73% over the past 12 months. An analyst who bought it a year ago could pretty much want to cash out some of his profit or simply liquidate his position. This is a very interesting return for an investor; you might want to jump onto another train that goes faster instead of staying on this one. But because the portfolio manager will sell millions of dollars of HP while you only hold a few thousand, he has an influence on the stock price, you don’t.

Don’t forget portfolio managers also have their jobs to save from time to time. I know for a fact that some traders became a lot more insecure about their jobs! This changes their perspective of investing and influences their decisions. After all, they are humans before being traders!

I’m interested to see what the company shows compared to analysts’ expectations to understand where the company is going and where the analyst thought it should go. However, missing expectations with positive results is definitely not the end of the world. IMO, what happened to HP just created a buy opportunity for small investors like me!

Do you follow analyst expectations and recommendations?

Disclosure: I hold shares of HP.

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