Pssst! Whisper Numbers Are Back A company beats its earnings forecast--and its stock falls. The culprit: an unspoken target
(MONEY Magazine) – The whisper number, a sinister phenomenon that disappeared during the bear market, now seems to be back when companies issue their quarterly earnings reports. For investors, that can create excellent opportunities to buy solid growth stocks on weakness.
Whisper numbers, you'll recall, are the real expectations for earnings and other financial targets (like sales growth and profit margins) that analysts watch for and relay to favored clients sotto voce--and that often differ from the predictions they make for the general public. As unrealistic hopes and free-floating anxiety combine to create expectations that few stocks can fulfill, the impact of these unofficial targets may end up whipsawing the stocks of some very solid companies.
HERE'S HOW IT WORKS: In many cases, for a stock to rally on an earnings report, it has to beat not only the public consensus but also the secret targets. When results fall short of the unofficial numbers, share prices sag.
The reactions to recent earnings reports from 3M and IBM suggest that whisper numbers may be back. Both are attractive long-term holdings that are languishing because their latest reports didn't meet Wall Street's unacknowledged targets.
An uncelebrated success story of the bear market, 3M has seen its share price more than double since 2000. One reason: Its earnings have beat expectations for six quarters in a row. Its recent report continued that trend with a 25% gain in profits, topping consensus estimates by 1¢ a share. Yet the stock sold off, closing down $4.79 to $ 83.05.
The whisperers may have been disappointed that sales didn't top the forecasts and strength in some divisions, such as flat-panel screens, wasn't matched in others. But 3M's biggest problem also might be that its price has run ahead of earnings growth. At $82.30, 3M trades at nearly 20 times next year's estimated results. That's not an unreasonable valuation, but any further sell-off would make the shares more compelling.
And Big Blue? Despite three straight quarters of higher earnings, its stock is down 15% from it's February high. Yet second-quarter earnings rose 17% and came in above consensus estimates. Granted, its report had weak spots, and analysts are worried about the year's second half. IBM executives sound upbeat, but many investors question the health of the semiconductor and personal-computer fields.
Long-term investors should recognize that IBM is the best-diversified tech giant. And at $84.86 a share. it trades at less than 16 times next year's projected earnings. That's something to shout about. --MICHAEL SIVY