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What to do with whispers
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August 7, 2000: 3:32 p.m. ET
Learn what whisper numbers really mean and what they offer for investors
By Peter Di Teresa
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CHICAGO (morningstar.com) - If you're an investor tracking the latest batch of earnings reports, you're probably hearing a lot about whisper numbers. But what exactly are they and how do they affect a stock's movement? And, more importantly, do they matter for long-term investors?
Peter Di Teresa, a senior analyst with Morningstar, a mutual fund research firm, answers one reader's questions.
I've noticed that stocks sometimes report higher earnings than analysts had estimated yet still drop in price because they didn't beat the "whisper" earnings. What are whisper earnings?
Sam N.
Sam hits on why whisper numbers can bemuse investors. You think you've researched all there is to know about a stock, and one day its earnings versus some unattributed estimate drives its price up or down. To explain why that happens, I'll look at what whisper numbers are, where they come from, and why you should ignore them.
What Earnings Estimates Are
To understand whisper numbers, you first have to understand earnings estimates. Earnings estimates are Wall Street analysts' forecasts of what they expect a company to earn in a given quarter. Earnings estimates from a service such as Zacks Investment Research or Firstcall are known as consensus estimates. They're the averages of the estimates put out by all the individual Wall Street analysts covering a company.
Analysts develop their estimates based on a variety of factors, such as their knowledge of the industry, the company's competition, and especially input from the company.
Whisper numbers can be seen as corrections or revisions of official estimates. That's because there are a couple of problems with the estimates. One is the influence of the companies, which have an interest in downplaying the numbers because beating an estimate looks a lot better than meeting or missing a higher one. The other problem is that analysts make their estimates months before a company makes its quarterly earnings report. Analysts usually don't revise their estimates unless there's important news from a company.
 Whisper numbers, which usually crop up much closer to the company's reporting date, are what someone (more on whom that someone might be shortly) thinks the company will really earn for the quarter. Investors pay attention to these numbers because they often are much closer to actual reported earnings than are analysts' estimates. A study by Bloomberg showed that consensus estimates missed actual earnings numbers by an average of 44 percent, while the whisper numbers were off by less than half as much.
Who's Doing the Whispering
Considering how seriously some investors take whisper numbers, it's amazing that no one seems to know where these numbers actually come from.
The numbers could be from an analyst who thinks a company's earnings will be stronger but who doesn't want to be tied to a higher number because it's worse to overshoot the numbers than to lowball them. Or maybe company insiders are themselves leaking the information.
Or the whisper number could be coming from the guy at the desk next to you who spends more time surfing the Internet than working. The numerous Web sites that post whisper earnings get much of their information by searching conversations boards and articles on other Web sites, as well as inviting visitors to the site to offer tips. The first site to post whisper numbers, www.whispernumber.com, proudly proclaims that it uses "information actually provided by and acquired from the investor." That is, it's coming from anyone who cares to send it in.
So What?
The real problem with whisper numbers is that though they may be more on target than official estimates, they're just as focused on the short term. They aren't a sound basis for investing.
But wait, you say, It's an investing maxim that stock prices follow earnings. Shouldn't I know what a company's actual earnings are likely to be?
Stock prices do follow earnings, because growing earnings mean the company is increasing in value, and stockholders benefit from that. The problem with whisper estimates--or even official estimates, for that matter--is that they can lead to short-term rises and dips in a stock's price depending on how actual earnings match up with the estimates. In other words, a company with terrific long-term growth potential can get spanked for not topping the whisper numbers for a single quarter.
It's no coincidence that the vast majority of whisper earnings concern technology stocks, the haunt of fast-buck investors. If you're a long-term investor--I mean someone who would hold a stock for a few years rather than a few quarters--ignore the whispers. 
-- Peter Di Teresa is a senior analyst with Morningstar.com. He can be reached at prof@morningstar.com.
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