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March 20, 2007
Earnings Estimates

If only it was easy. You want to evaluate a company because you think it is going to be the next hot stock. You decided to verify your belief with a little research. You log onto the Internet and do a search; you were right! The stock climbed 20% last year so you rush off to buy 500 shares. It is true that past earnings can give you an idea of the likelihood that a stock will perform well in the future but that’s only an indication. To get a better view of the future, you need to look at the earnings estimates.

What are Earnings Estimates?
At the risk of sounding simple, it is exactly what its name implies; an earnings estimate is a projected, “educated guess” at the upcoming performance of a particular company. When coupled with a company’s past earnings, earnings estimates can have a certain amount of credibility since barring any unforeseen circumstances, a company will tend to maintain its existing trend. While earnings estimates don’t factor in stock volatility or changes in the economy, they do carry enough weight that analysts at major investment banks, brokerage houses and other institutions produce earnings estimates for actively traded stocks.

Not Cast in Stone
Earnings estimates have an interesting feature. Unlike metrics like earnings per share, the projections that earnings estimates represent are not static; since they are the best projections based on available information, the numbers change as the information evolves. These numbers, which are constantly revised, are guesses about what the company will be earning in the coming years. This revision can be upward or downward based on the factors involved. If the economy falls into a recession, the earnings estimates for a company may be adjusted lower. If a company is outperforming its estimates, the same numbers might be adjusted higher.

There are a number of websites on the Internet that report these estimates on their stock quote screens. Most collect a number of estimates and average them for a consensus estimate in one form or another.

The Only Information You Need?
If you can glean this information from the Internet or a stock screener, you might be wondering if you need anything else to start making stock trading decisions. The answer is…yes! You cannot get a full picture of anything by looking only at the earnings estimates. Successful trading starts with basic stock information but it depends on solid fundamental and technical analysis.

Have you put together your stock trading plan yet? If not, earnings estimates really won’t help you much. Your trading plan is your key to determining exactly how you are going to trade. What do you know about fundamental analysis and technical analysis? Being able to determine the financial health of a company and the current status of its stock is crucial.

One More Thing
There is one more piece to this puzzle. In addition to earnings estimates, a trading plan and technical and fundamental analysis, it is imperative that you have a stock trading system like Japanese Candlesticks. The candlestick charting system is a powerful tool in determining the directions of an asset even before it moves.

We can’t foretell the future, but investing in companies that have delivered solid earnings estimates and show strong consensus earnings estimates is a good choice.

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