Speaker 1: For our third segment, we're taking a listener question. This is from Muffin. That's not the real name. That's the username on YouTube. Muffin says, can you please do an in-depth explanation about Wall Street expected earnings? For example, are expected earnings made up from a collected average of different predictions, or is it just one entity that formulates predictions?

Speaker 2: You wanna take that, Scott? Sure, that's a good question, and I'll give you what is hopefully a mediocre answer. An earnings estimate is the consensus of analyst estimates for a company's future quarterly or its annual earnings per share, often referred to as EPS, and then they also will talk about revenues. Analysts use these projections to evaluate the value of a company because most companies in a sector trade within a certain band of price to earnings, and that is the value of the stock over the earnings. So if it has earnings of 10 bucks and the stock's at 150, we have a PE of 15. In certain sectors, companies will trade between, say, 13 and 17 based on the growth outlook or how charming and how cool the leather jacket is of the CEO. The expectations come from equity analysts at large investment banks that study certain stocks, and the number of analysts forecasting annual earnings of a major corporation is typically in the range of 10 to 40. Then there's other research companies that compile all the analyst estimates for a stock and compute the consensus. So it's sort of the average of all the different analysts' estimates. Consensus estimates created by different companies, they vary based on which analyst suggestions they include in their own methodologies. And then analysts base their predictions on trends, macroeconomic data, information in company filings, earnings calls, and anywhere else they can find information. A good analyst might actually go to a store of a stock they're monitoring to gather more information. They do a lot of retail checks. Retail analysts love store checks where they look at just traffic in and out of the store. And it's really more of an art than a science. And then there's something called the whisper number, and this refers to unofficial, unpublished estimates made by professional traders or fund managers on Wall Street, typically in response to late arriving information. Inside information or based on speculation not deemed reliable for a published report. In other words, there's a rumor and there's the whisper number. So the problem here is that one, analysts are typically sycophants and stenographers. And that is they're paid by an investment bank that wants to play golf with the CEO of that company and get their wealth management and their follow on equity raised business. That's not to say they're not good at what they do, but they have the wrong incentives. So ideally, what you want is a independent analyst. And Arate Research that does telco, my buddy Richard there, they get paid by investors just to give no mercy, no malice analysis. I think Sanford does the same thing. So there's been an emergence of independent equity. I think Lynn Alden is a fantastic analyst. And as far as I can tell, she just calls balls and strikes based on what she thinks. So when you have an analyst from Goldman and Morgan Stanley and a company agrees to take them public, you can bet the analyst is gonna come out with a bullish buy report. And then they tend to be very rear view looking. And that is once the company announces a better quarter, the analyst, what do you know, takes the price target way up and keeps taking it up until the company throws up on itself and then decides the stock price should have been or the target price for the stock should have been lower. What you've also seen is a decimation in the bulge bracket analyst community. When I was at Morgan Stanley, the stars were the analysts because the analysts move the markets and a company would say, well, if you get Jack, who's the premier telco analyst, Solomon Brothers will give you our investment banking business. And then regulation came along and said, this feels really uncomfortable that you have analysts telling retail investors to buy because they have incentive to get investment banking business. And so they created sort of a Chinese wall, which meant that analysts couldn't have as much direct impact on the profitability of company because they technically weren't supposed to get or garner or be awarded with investment banking business. So all of a sudden investment banks started cutting their research staff. So any company with less than a billion in market cap generally is undercovered. What I find is really interesting is taking a basic finance course, basic balance sheet, finance valuation. You can take that on YouTube. You can take Demodaran's course, who is literally the Dean of Valuation and then reading through the earnings transcript on seeking alpha and trying to come up with your own valuation. It's just a really interesting exercise and it gives you insight into the markets.

Speaker 1: Yeah. Yeah. Just to answer the question in brief, yes, it's a collected average. And we basically take, if we were to say it completely truthfully on this podcast, we'd say something more like a survey from Refinitiv of analysts showed that the earnings per share were expected to be this. But instead, it's an average of pretty trusted, talented analysts on Wall Street. So we just say earnings per share expected were this. But Scott, going back to your question about, going back to your point about accuracy, there's this one study that found that on a three-month time horizon, analyst earnings expectations are only roughly 18% accurate, put another way, just very often wrong. To what extent do you pay attention to analyst estimates and expectations when you're analyzing a stock? Or do you just look at what the company says, its forecasts are, and also its historical performance?

Speaker 2: I read analyst reports to understand the company and get a better feel for the company, but I ignore the price target. I think the earnings estimates are worth looking at. Generally, they do get ranked and evaluated based on their ability or their accuracy around earnings estimates, but I don't look at their price target. I just try and, a lot of times, I have a lot of insight into the company, and you should read both sides, find independent analysts. I mean, some of you just wanna read everything you can about the company and try and get a real feel for it. I find that there's new sources of information that are really valuable, and that is just doing word clouds on the earnings call and just to get a sense for their strategy, doing an analysis of Google keyword searches, and that is how many people are searching for Airbnb versus three months ago, which will give you a sense for bookings. How many people, how many job openings in AI does a company have will give you insight into its strategy. It's just, there's so many new sources of information. That's not the hard part. People say, well, information is in the oil. Not really. Or, okay, if it's oil, it's a buck a barrel. What's really expensive and valuable is refining capability, and that is intelligence that looks at all of this data and these new datasets and says, how does that all bubble up to a buy or a sell recommendation? Yep.

Speaker 1: And just a reminder to our listeners, we're reading your questions and comments on YouTube, on Twitter, in our inboxes, so keep them coming, and we'll be happy to answer them.