I am retired and take educated guesses on all things financial.

September 18, 2006

September 19, 2006: Analyst estimates and pigs

In October, 1999, about three months before the start of an ugly bear market (actually, the worst in a quarter century), 69 percent of analyst recommendations reported in Thomson Financial's database advised investors to buy stocks. Another 30 percent of the recommendations were to hold. Less than 1 percent of the recommendations advised selling (the correct call,in hindsight).

The dismal cumulative record has improved substantially since. At the end of July, 2006, only 6.6 percent of analyst recommendations were sells. We all know there is is no way 94 percent of stocks are going up, or should be held.

Not suprisingly, a good many risk-averse investors think analyst estimates provide, at best, flawed guidance. I believe that the situation has improved to a degree. Since the disclosure requirenents went into a few years ago, investors can be more confident that the analyst is not being a shill for the company, and the numbers crunched are more accurate a presentation than previously.Still, analysts under-estimate actual earnings by about 3 percent a quarter, which adds up over the course of a year. This brings us to the "whisper number" which received widespread use (abuse) on CNBC and like stations in the latter 1990s during the tech era. Although the so-called whisper numbers became an absurdity then, the whisper numbers being bantered about now, which generally run 2 percent or more higher than analyst published forecasts. are actually quite right.

Of course, one needs to look at more than earnings. A stock with steady positive earnings revisions may still be too expensive from the perspective of its price-to-earnings ratio. And never ignore negative trends in earnings estimates (or the resignation of the CFO). Analysts do know enough to lead to in the correct general direction most of the time.

Speaking of the correct general direction, I am pounding the table literally and figuratively for the great acquisition of Premiun Standard Farms (PORK) made by Smithfield Foods (SFD) yesterday. This was a superb deal for Smithfield Foods. SFD will control approximately 30 percent of the pork market. With the difficulty getting permits to build new hog farms, Smithfield gets them in this deal on the cheap. Plus, with the exceptional processing of hogs from the snoot to the tail by Smithfield, extra value added contents of the hogs will add immediately to Smithfield's bottom line. In a conference call to shareholders yesterday, the CEO of Smithfield Foods expressed his view that the acquisition frenzy will now cease and Smithfield will now assimilate the companies and brands into a seamless goliath of meat products and by-products. I believe him, and recommend the shares for immediate purchase (trading at 28.22). Go whole hog.

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