Based on casual analysis, it seems there has been a decline in the number of analysts making long-term earnings forecasts on publicly traded stocks. When the subject was raised during a regular portfolio review meeting, we lacked the evidence to support or debunk this hunch. So, using AAII’s Stock Investor Pro stock screening and database program, some numbers were crunched. The findings have potential implications for investors looking at or using long-term growth estimates.
First, let’s discuss the data. We looked at the number of exchange-traded stocks with at least one analyst providing a long-term earnings per share growth estimate. The hypothesis was that this number may be in decline. The numbers were run using end-of-year data, except for 2018. As of Tuesday, Thomson Reuters (AAII’s data provider) currently lists long-term forecasts on 3,690 companies—the fewest in seven years and the second fewest since at least 2002.
The number has ebbed and flowed on an annual basis. It reached a peak in 2007 (4,113) before bottoming in 2010 (3,665) and then rebounding to as high as 4,110 in 2015. Unlike the number of exchange-traded stocks, which has been declining, there is no discernable trend in the number of companies analysts are publishing long-term forecasts on. This is not the full story, however.
When the data was parsed to look at how many companies only had one analyst publishing long-term forecasts, a different story emerged. On both an absolute and percentage basis, there is a growing amount of companies with just one analyst comprising the I/B/E/S (Institutional Brokers’ Estimate System) consensus long-term earnings per share forecast. In 2002, single-analyst forecasts accounted for just 15.0% of companies with published long-term projections (566 out of 3,783). By 2010, 28.7% of companies had a single analyst publishing long-term forecasts (1,052 out of 3,665). Now, more than half of all consensus long-term earnings forecasts (52.2%, or 1,926 out of 3,690 companies) reflect the projections of a single analyst.
Consensus earnings estimates are the average of the forecasts made available by analysts. There is no required minimum on the number of analysts behind a forecast, so a small company could have a single analyst projecting future earnings while a large one could have many. For instance, the consensus long-term earnings per share growth estimate for Dow Jones industrial average component UnitedHealth Group (UNH) reflects the forecasts of eight analysts, while S&P SmallCap 600 index member Winnebago Industries Inc. (WGO) has one just one analyst providing a long-term forecast.
Having projections from a larger number of analysts does not necessarily improve the accuracy of the consensus forecast. Various studies have shown the accuracy of analysts’ forecasts decreases the further out into the future projections are made. Long-term forecasts typically cover periods of three to five years, a long enough period for many events not adequately accounted for in forecasts to occur. What having more analysts in a consensus forecast does do is smooth out the extremes. Any single analyst can be overly optimistic or pessimistic. The presence of other analysts can bring the estimate closer to a midpoint.
From an investing standpoint, there are two implications. The first involves assumptions about a company’s long-term prospects. The rise in single-analyst long-term growth estimates should be a reason to place less weight on them. The second involves valuations. A wider margin of error should be factored in when using valuation measures based on long-term forecasts, such as PEG (price/earnings-to-earnings-growth) ratios. Seek out deeper discounts when buying and be warier of premiums when it comes to decisions regarding holding or selling.
- Regulations Did Not Improve Analysts’ Accuracy – Among the various studies to find fault with analysts’ forecasts was this one, which we discussed in the July 2015 AAII Journal.
- Valuation Ratios: The PEG Ratio – The PEG ratio factors in a company’s growth into its valuation, allowing investors to compare companies with different rates of growth.
- How ETF Shares Are Created, Redeemed and Traded – This AAII InvestoGraphic shows what happens behind the scenes to keep ETFs trading close to the underlying value of their assets.
- Using the Power of the Written Word to Improve Your Returns – Simple tools such as journals, checklists and rules can both make you more disciplined and help you to spot and avoid mistakes.
I will speak to our New York City local chapter on Wednesday and to our Millburn, New Jersey, investor education group on Thursday. Not in the New York metro area? Come see me at our Investor Conference, which will be held October 26–28 in Las Vegas. My colleague Wayne Thorp and I will be holding pre-conference investing boot camps on October 25. Spots are limited, so don’t wait to register if you’re interested in coming.
Five S&P 500 members are on the earnings calendar: Paychex Inc. (PAYX) and PepsiCo Inc. (PEP) on Tuesday; Lennar Corp. (LEN) on Wednesday; and Constellation Brands Inc. (STZ) and Costco Wholesale Corp. (COST) on Thursday.
The week’s first economic reports will be the September Purchasing Managers’ Manufacturing Index (PMI), the September Institute for Supply Management (ISM) manufacturing index and August construction spending, all of which will be released Monday. The September ADP employment report and the September ISM non-manufacturing Index will be released on Wednesday. Thursday will feature the August factory orders. September jobs data—including the changes in nonfarm payrolls and the unemployment rate—along with August international trade data will be released Friday.
Nine Federal Reserve officials will make public appearances: Atlanta president Raphael Bostic on Monday and Friday; Minneapolis president Neel Kashkari and Boston president Eric Rosengren on Monday; vice chairman Randal Quarles on Tuesday and Thursday; chairman Jerome Powell on Tuesday; Chicago president Charles Evans, Richmond president Tom Barkin, Philadelphia president Patrick Harker and Cleveland president Loretta Mester on Wednesday.
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Optimism among individual investors about the short-term direction of the stock market rose but remains below average. The latest AAII Sentiment Survey also shows declines in neutral and bearish sentiment.
Bullish sentiment, expectations that stock prices will rise over the next six months, rose 4.2 percentage points to 36.2%. Even with the increase, optimism remains below its historical average of 38.5% for the third consecutive week.
Neutral sentiment, expectations that stock prices will stay essentially unchanged over the next six months, pulled back by 3.2 percentage points to 32.7%. Neutral sentiment remains above its historical average of 31.0% for the 31st time in 32 weeks.
Bearish sentiment, expectations that stock prices will fall over the next six months, declined by 0.9 percentage points to 31.1%. Pessimism is above its historical average of 30.5% for a third consecutive week.
At current levels, all three indicators are well within their typical historical ranges.
Most of the responses for this week’s survey were recorded before yesterday’s Federal Open Market Committee (FOMC) meeting statement was released. The survey period runs from Thursday through Wednesday. In July, almost half of the surveyed AAII members said they favored further rate hikes. Some, however, expressed concern about the impact that higher rates would have on the economy. We’re asking them again about their views on monetary policy.
Tariffs and the possibility of an escalating trade war remain front and center on the minds of many individual investors. Also influencing sentiment are Washington politics (including President Donald Trump), midterm elections, economic growth, valuations and corporate profits.
This week’s special question asked AAII members what they thought about the overall sentiment being reflected in the market among both institutional and individual investors. Responses were mixed. Almost 28% of respondents agree with the current level of optimism or otherwise describe sentiment as bullish. Economic growth, earnings growth and the tax cuts were among the reasons given. A nearly equal proportion (27%) of respondents think there is too much optimism priced in or otherwise believe the downside risks are not being properly priced in. Almost 15% of respondents say there are opposing trends currently being reflected in the stock market.
Here is a sampling of the responses:
- “The market may be a bit overbought. There are a lot of good expectations priced in, and I think bad news could cause a decline.”
- “There is a lot of optimism about the economy and corporate earnings, but the political environment makes the market very nervous.”
- “The market goes up; sentiment is accurate.”
- “Investors are not yet paying attention to tariffs and the trade war.”
- “Stocks have performed well and the economy is stronger than it has been in a long time.”
Bullish: 36.2%, up 4.2 points
Neutral: 32.7%, down 3.2 points
Bearish: 31.1%, down 0.9 points
Bullish: 38.5%
Neutral: 31.0%
Bearish: 30.5%
Local Chapter Meetings
September 20, 2018 SEC to End Five-Cent Spreads on Small-Company Stocks
September 13, 2018 Mr. Market Has Reverted Back to a Calm State
September 6, 2018 Helpful Steps My Late Father-in-Law Took
August 30, 2018 Despite Problems With Short-Term Thinking, We Should Keep Quarterly Earnings
