January 22, 2010 / 8:48 PM / 10 years ago

Whispers may be behind sell-offs after profit beats

NEW YORK (Reuters) - While a majority of companies have reported better-than-expected profits in the current earnings season, a few key firms have missed their “whisper number,” a metric that is similar but considerably tougher to beat.

Missing the whisper number has been a factor in the market’s inability to maintain its recent positive momentum, analysts say.

Whisper numbers, according to www.WhisperNumber.com, the financial research firm that publishes the data, are unofficial estimates for corporate earnings. They are based on such metrics as fundamental research, past performance and “gut feel,” and the numbers are often higher than analyst consensus estimates, making them harder to surpass.

“It would be too much to put all of a stock’s movement on a whisper number, but I would say they’re more important than consensus expectations,” said Christopher Zook, chairman of CAZ Investments in Houston, Texas.

Perhaps the most notable example of a whisper number’s influence in the current season is International Business Machines Corp.

On January 19, the tech giant reported fourth-quarter earnings of $3.59 a share, above the consensus expectation of $3.47 but below the $3.76 a share whisper number. After rising in anticipation of the results, IBM fell after they were released, pressuring tech stocks.

“IBM is a clear example of whisper numbers being more important than consensus estimates,” said John Scherr, president of WhisperNumber.com, in Sparta, New Jersey. “Expectations move markets, and whisper numbers are information based on expectations rather than estimates.”

While few doubt the influence whisper numbers have on share movement, some question how credible the numbers are, as they can be used by traders to talk up their own positions.

Terry Morris, senior vice president and senior equity manager for National Penn Investors Trust Company in Reading, Pa., says if someone is whispering a number, that should be the estimate.

“I don’t like these games that analysts play. If they have an estimate, they should put what the analysts actually say, and not say, ‘Oh, we were actually expecting them to beat (the whisper number),’” he said.

“There’s negative credibility for analysts,” Morris added. “They want to see the company they cover beat expectations, but they need to understand they’re part of the consensus. If they low-ball the estimate, they need to understand that that is going to skew the estimate down.”

With the S&P up more than 60 percent from the multiyear lows reached in March, investors are increasingly looking to new data points for guidance as to whether the rally is sustainable.

Whisper numbers, which were popularized during the dot-com era, have been making a comeback in recent times, with the economy going through its worst recession in decades.

“Especially when the economy is going badly, people focus on the whisper and make investments off that because everyone knows what the consensus is, meaning there’s no edge to trading off that,” Zook said.

Roughly 18 percent of companies in the S&P 500 have reported results thus far, with nearly 80 percent posting profits above consensus estimates by an average upside surprise of 21.4 percent, according to Thomson Reuters data.

In comparison, only 67 percent of companies have reported results over their whisper numbers, with a surprise factor of 10.7 percent, according to WhisperNumber.com.

Since January 11, when Alcoa Inc unofficially kicked off the earnings season, the S&P has fallen more than 3 percent. Much of those losses came in recent days, as several banks posted quarterly losses and President Barack Obama announced sweeping restrictions on the financial sector.

Although Obama’s proposals and other factors have influenced the market as a whole in recent days, analysts say the impact of whisper numbers cannot be discounted.

“Whisper numbers are incredibly important, especially for big-name companies,” said Dave Rovelli, managing director of U.S. equity trading at Canaccord Adams in New York.

“With share prices up so much in the past quarter, there’s been a greater reliance on them. For a stock to rise beyond what it’s done, you need to not just beat expectations but post blow-out numbers that also top the whisper.”

WhisperNumber.com’s Scherr said he was seeing more influence of whisper numbers on stock movements, with the most highly traded stocks getting the most scrutiny.

“Obviously, banks are popular this week,” he said.

Editing by Dan Grebler

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