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September 29, 2018

More Than Half of Stock Long-term Growth Forecasts Are from Just One Analyst

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. 

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.

The Week Ahead
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.
Courtesy of Charles Rotblut, CFA is the VP and Editor for American Association of Individual Investors (AAII). Charles is also the author of Better Good than Lucky. (EconMatters author archive here)
The views and opinions expressed herein are the author's own, and do not necessarily reflect those of EconMatters.

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