Message Font: Serif | Sans-Serif
 
No. of Recommendations: 0
I believe that a part of the problem is the already high valuations assigned to many public companies.

Analysts all have valuation models, a lot of which are based in one respect or another on a discounted value of future earnings or cash flow or something in between.
I'm guessing (since I have no actual knowledge, but just a theory..) When a company does not live up to the current numbers plugged into their models, the new lower numbers don't only affect this year's estimated numbers, but every year into the future. Therefore there is almost an exponential affect on the discounted current value for that company. So a decrease in earnings of 6% this year, could lead to a decrease in present valuation of 14% or 15% (or larger).

Why there is no corresponding affect when there is an increase in earnings over the estimates could (if my theory is correct) result from the analysts NOT making any changes (or few changes) in future projections just because this quarter earnings were 6% higher than expected. Therefore, the current valuation would not change as much.

Anyway, that's just one plausible theory. Though the more I think of it, the more I like it. It's simple enough to work. But, if anyone knows the reality, please let me know.
Print the post  

Announcements

What was Your Dumbest Investment?
Share it with us -- and learn from others' stories of flubs.
When Life Gives You Lemons
We all have had hardships and made poor decisions. The important thing is how we respond and grow. Read the story of a Fool who started from nothing, and looks to gain everything.
Community Home
Speak Your Mind, Start Your Blog, Rate Your Stocks

Community Team Fools - who are those TMF's?
Contact Us
Contact Customer Service and other Fool departments here.
Work for Fools?
Winner of the Washingtonian great places to work, and Glassdoor #1 Company to Work For 2015! Have access to all of TMF's online and email products for FREE, and be paid for your contributions to TMF! Click the link and start your Fool career.
Advertisement