Fairly early in the equity bubble of the late 1990s and early 2000s, I began spilling my share of online ink on the subject of the Wall Street game of beat-the-number.
The beat-the-number nonsense fit perfectly into the Bubblevision mentality and was eagerly lapped up by Wall Street. However, as the excesses of that era unwound, I was certain that superficial "analysis" would end. A return to sanity should involve a return to more-intelligent behavior, and nothing is dumber than looking at a company's earnings, "analyzing" whether it made a penny more or less than the average guess and then buying or selling the stock on that basis.
It turns out that I was wrong. The game continued. But as the real-estate bubble grew, I became even more convinced that after that bubble burst, the days of beat-the-number would be behind us. Yet here Wall Street is to this day, still playing that same nonsensical game (along with Bubblevision).
Mine over matterI don't know of an industry more than mining where it is crazier to judge a company's results by the beat-the-number yardstick.
There are so many issues and moving parts that can affect a mining company's quarterly results -- but don't tell you anything about whether the near-term or long-term prospects of the business have changed -- that a judgment based on beat-the-number considerations is almost comical. If doctors behaved as many analysts or money managers do, they would be sued for malpractice.
I make the point about mining because, after having been a director offor about 14 years, I know the mining business reasonably well. But I am sure the same point can be made about other industries, from close cousins to mining, like energy extraction, to enterprises that are quite different.
In fact, as I have maintained for the past decade, companies that excel at beating their numbers probably are managing earnings -- therefore, their success at that game tells you nothing about what the businesses are actually worth. Witness the long run of wins "by a penny" of financial entities during the credit/housing bubble, many of which went bankrupt (or nearly did) in 2008-09.
There's no joy in winning a loser's gameLast week conveniently offered us a case study of this phenomenon with a mining company (which triggered this rant on my part).
, which I have followed for a long time, reported earnings July 27 that were less than what Wall Street analysts had predicted, so it was deemed a loser at beat-the-number.
Click graphic to see interactive chart
Newmont earned slightly less than people had forecast due to a few issues that were not earthshaking nor indicative of trouble. Yet the business headlines all focused on whether it had won or lost at the game.
Making or beating an estimate in the mining business can be particularly misleading, because inventories, to pick one line item, can change meaningfully due to short-term production and logistical issues. Newmont has more than $1 billion in that category (counting ore on leach pads). If less than 10% of that had been shipped, the company would have been deemed a winner.