Valuation and earnings estimates

I just read another great article from Chuck Carnevale on Seeking Alpha. I highly recommend investors take the time to read Forecasting Future Earnings. A quick recap is that Chuck states that checking the analyst consensus earnings estimates is a starting point to determine future price action. Msnmoney.com could be used to do this quickly; just enter the ticker and click on Earnings in the left column.
For short term price action, traders use earnings 'misses' to buy on a short term dip. They then wait for the price to recover and then sell. 5% or more can be obtained doing this. Earnings 'surprises' are a short term driver of prices. For longer term buy and monitor investors, the 1,2 and 5 year estimates are a good place to start when looking at a business. This earnings guidance is obtained by the analysts from the management of the company among other places. It is good to keep in mind that 1.) the analysts get paid to do this and want to do their job well and 2.) the management giving the estimate information want people to buy their stock. If they overestimate and there is a subsequent miss on earnings, stock price goes down and people sell. Therefore management often underestimates earnings estimates-something for investors to keep in mind.

There are lots of other drivers of prices-lawsuits, natural events and disasters, politics, etc that have nothing to do with earnings or earnings estimates. Due diligence is performed by paying attention to these and other factors.

The article also states that near term estimates are generally more accurate than longer term estimates and that total accuracy of the estimate is not the point. If the estimate is a few pennies off this should not affect our thinking as long term investors. The main point is that earnings are increasing.

To summarize, this entry is about business results and really not about price volatility. Price and research firm recommendations like Reuters and Value Line are a separate issue. Using earnings growth estimates can be useful in determining which business to choose when investing. Read Chuck's article for more info.