Wall Street’s equity analysts — the folks who recommend when to buy and sell stocks — are paid to make forecasts.
They forecast everything from industry trends, sales, profit margins, and, most importantly, earnings.
Now, it’s no secret that forecasts for earnings are revised frequently. After all, no one can really predict the future.
And it’s for this reason that we think Wells Fargo Securities’ technology team just made the single most ridiculous statement you’ll read in a Wall Street research note.
“Making One Last Cut To EPS”
“While consensus estimates clearly need to come down, we believe the stock is already pricing in one last round of EPS reductions,” they wrote. “We are lowering FY15 EPS to $US2.50 from $US2.52 and FY16 goes to $US2.70 from $US2.73 previously. “
However, to suggest this is the “last” cut implies that the analyst is convinced there will be no more surprises, which is inherently a contradiction. Presumably, that analyst didn’t expect to have to make any cuts when he or she initially published an EPS estimate. It’s only because there was new information or there were unexpected events that the analyst had to make those cuts. What if the US unexpectedly tumbles into recession? What if there’s a big foreign exchange move that slams its overseas operations? Can we really be sure that Microsoft won’t come out tomorrow and announce a big warning?
The analysts on Wells Fargo Securities’ technology team are probably very sharp, and their estimates are probably pretty close to what will eventually be revealed by Microsoft.
However, there’s a difference in having conviction in one’s forecasts and having conviction that there will be no more surprises.