A world devoid of reliable earnings intelligence has made it impossible to agree on what the market is worth. For investors convinced they have an edge, that’s an opportunity they have waited their lives for.
Wall Street earnings forecasts are hopelessly scattered. A measure known as estimate dispersion -- how much the highest and lowest per-share prediction varies on the average stock -- has soared to near record levels, according to Bank of America data, making judging company prospects a huge challenge. It’s all because of the confusion created by the coronavirus, wreaking havoc in a market swinging 5% a day.
Big money managers and traders have begun to view it as proving ground for anyone capable of on-the-fly accounting and the hundred other skills that go into judging relative value in real time. It’s a throwback to Wall Street’s wilder days, a chance for money managers to rise above each other and the passive investing onslaught that has been their bane for more than a decade.
“This is a time for active managers to shine,” said Adam Phillips, director of portfolio strategy at EP Wealth Advisors. “Their ability to deviate from the indexes and dig into reports more will allow them to hopefully avoid some of those potential land mines and better position portfolios.”
Earnings season begins in two weeks and Wall Street is bracing for a host of challenges. Companies have withdrawn guidance, and analysts used to measuring their error rate on earnings estimates in pennies will be lucky to come within a dollar for some companies. Aware of this, traders have pushed options-derived measures of expected volatility on earnings announcement days to near double levels in normal seasons.
For someone like Scott Bauer, chief executive officer at Prosper Trading Academy in Chicago, the confusion is a potential gold mine. He’s watched as things that would knock stocks around -- stock upgrades and downgrades, for instance -- lost potency. At the same time, disagreement among analysts on earnings is creating all kinds of noise, widening bid-ask spreads in options and creating the potential for professionals to feast.
“It’s a massive opportunity for traders,” Bauer said by phone. “For a retail investor trying to get into a position, it’s not great. For a professional trader, it’s fantastic because they can take advantage.”
To be fair to analysts, the companies themselves have no real idea of their own prospects. Only 30 companies provided guidance in March, according to Bank of America, the lowest ever for the month in 20 years of data. On top of that, more than 50 have pulled guidance altogether, according to Bloomberg Intelligence.
That’s just fine with George Dai, senior managing director and co-chief investment officer of Weatherbie Capital LLC. His team has always relied on its own fundamental research and has been able to hold many more calls with managers of the companies their funds hold to gain a real-time picture of how companies are being affected. It’s a typical refrain that makes more sense in an information vacuum: the edge comes from a variant view.
“It is true that consensus numbers may be stale for the foreseeable future,” Dai said. “However, we understand the ‘intrinsic value’ of our companies, which we believe are market leaders in their fields.”