The demented tyranny of Wall Street 'expectations'

Investors continue to judge earnings results against consensus guesses of analysts

Two well-known technology companies announced quarterly earnings after Tuesday's market close.

One company reported a 54% increase in quarterly profit and a 39% gain in quarterly revenue.

The other company reported a 26% decline in quarterly profit and a 24% drop in quarterly revenue.

Guess which company's stock is up and which company's stock is down on Wednesday.

If you thought the successful company was being rewarded by investors, you'd be making the mistake of thinking rationally, because instead that company -- Apple -- is being punished. Shares (NASDAQ: AAPL) were down as much as 5.6% in Wednesday's trading.

Meanwhile, the dysfunctional company circling the drain -- that would be Yahoo, folks -- has seen its shares (NASDAQ: YHOO) rise Wednesday as much as 5.7% over Tuesday's closing price. Yes, the Yahoo that has lost its identity, can't attract an effective CEO, is incapable of growing revenue, and is desperately seeking a buyer.

What kind of lunacy is this? Simple. It's the demented tyranny of Wall Street expectations, which colors the perceptions of investors to the point where some lose all touch with reality.

And here's reality: Apple was "expected" to sell 18 million to 20 million iPhones in its fourth quarter. Sadly, it sold only 17 million! But the reason for that is obvious to anyone who can read: The company didn't ship a new smartphone during Q4. It wasn't until last week that Apple's new phone -- the iPhone 4S -- became available for sale.

Guess what? It set a record for early iPhone sales. Not only that, Apple CEO Tim Cook said during Tuesday's earnings call with analysts that he was confident "we will set an all-time record for iPhone this quarter."

Sure, you can say that's just talk. It's talk, however, based on actual sales so far this quarter. Yet Wall Street responds not to that, or to the larger context, but to the horror of Apple missing the "expectations" of a bunch of analysts, few of whom could agree on a precise unit sales forecast.

By the way, there's another word for "expectations," and that would be "guesses." That's what analysts do. They make predictions, or guesses, about how a company will perform. Many of these are "educated" guesses, no doubt, which of course makes them...guesses!

Despite this, investors continually base their trading decisions on analyst forecasts that usually are bundled up and averaged out to some sort of informed "consensus." It's more like nonsensus.

Yahoo's third-quarter profit of $293 million, or 23 cents a share, was down from $396 million, or 29 cents a share in the year-ago quarter. Revenue was $1.07 billion, down from $1.12 billion a year ago. Worse, display-ad sales -- supposedly Yahoo's most important sales metric -- were flat at $449 million. This has been Yahoo's story for several quarters, and it's not getting any better.

Yet because consensus analyst "expectations" were for the Internet pioneer to post 17 cents a share profit on revenue of $1.07 billion, some investors want to party with Yahoo like it's 1999, when shares topped $100, or about six times what they're worth today.

I know Apple shares are close to an all-time high, while Yahoo's are (historically) a bargain. But investors on Wednesday were responding to the earnings reports relative to expectations, not historical share prices, which essentially were the same on Monday.

It's a form of madness, I tell you.

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