Past performance is not an indication of future performance. How many times have you heard that? Of course, earnings estimates provide one strong measure of potential future performance and are a mainstay of stock investing research.
Earnings estimates are exactly what they sound like: an estimate of forecasted earnings. Notice the built in ambiguity? It’s there for a good reason. Revised estimates are a given contingent upon market conditions, the overall economy and other unforeseen forces impacting the profitability of the company. You might wonder how analysts get away with forecasting earning estimates only to revise them – repeatedly – at the first sign of trouble. All too often, the average investor has already acted on the first estimate and is left holding a rapidly declining security – sans fees.
Is there a solution? Yes, search for companies with upwardly revised earnings estimates and steadily rising analyst ratings.