Analysts' estimates sway most buy, sell decisions

December 08, 1993|By Andrew Leckey

Call it "Big Mo." Besides its acknowledged role in political campaigns, momentum is critical in investing as well.

In fact, momentum in the corporate earnings estimates made by securities analysts should be the single most important consideration when choosing whether to buy or sell a stock, according to one research firm.

"Changes in analyst estimates clearly drive individual stock prices, and are really more important than actual earnings growth," declared Benjamin Zacks, executive vice president of Zacks Investment Research, whose data on brokerage firms is used nationally. "We've found that 90 percent of all buy or sell decisions are based on earnings estimates."

Each day, the 80-member Zacks staff compiles earnings estimates and buy/hold/sell recommendations of the nation's securities analysts to spot trends in 4,000 equities. Brokerage firms provide data in exchange for information from Zacks on how their picks vary from general Wall Street thinking.

Over the past 13 years, the top 150 stocks on the Zacks list have gained 34 percent annually vs. the 15 percent average gain of the Standard & Poor's 500 those same years.

Stocks that Zacks currently suggests buying, based on strong momentum of analyst earnings estimates and positive recommendations, include:

* American Express. Its travel services and Lehman Brothers investment banking divisions are rebounding. The consensus earnings-per-share estimate by analysts for the current quarter is 67 cents, up from the 15 cents reported in the year-earlier quarter. Salomon Brothers recently upgraded its recommendation on the stock from hold to buy.

* Chrysler. Sales of Jeeps and minivans are booming, with good prospects for the new Neon small car as well. Consensus earnings estimates have been moving up sharply the last few weeks, to $5.38 a share for 1993 and $6.71 for 1994. Adding to this positive feeling is the fact that third-quarter earnings per share were 48 percent higher than the consensus estimate.

* First Chicago Corp. Growth in this banking firm's credit card division is boosting earnings. Analysts' most recent estimates for 1993 average $7.70 and for 1994 $6.05, which compares favorably to the consensus estimate for all analysts of $7.26 for 1993 and $5.91 for 1994.

Additional stocks with accelerating earnings estimates, which should be bought on price declines, Zacks believes, are:

AGCO Corp. in farm machinery; Aldus Corp. in computer software; Armstrong World in building and construction; Computer Associates in computer software; Cummins Engine in diesel engines and components; Dover Corp. in industrial machinery; Electro Scientific Industries in laser systems; National Semiconductor in electronic components and semiconductors; and Premark International in Tupperware and food equipment products.

"When there are no changes in earnings estimates, a stock will typically tread water with the overall market," said Zacks, noting that this year analysts have tended to reduce estimates just before earnings reports, contributing to a situation in which results are running 1 percent to 2 percent over those estimates.

(For individual investors, Analysts Watch from Zacks Investment Research costs $249 annually for 24 issues and a daily telephone hot line that can provide updates on company data. Address is 155 N. Wacker Drive, Chicago, Ill. 60606. The toll-free telephone number is 1-800-399-6659.)

Historically, more earnings estimates are reduced than increased, Zacks has found. The market has become efficient due to greater available information, with most everyone in the investment community aware of data and capable of distilling it. Fifteen percent of analyst earnings estimates are right to the very penny this year, up from 9 percent a year ago.

Zacks says investors who benefit most from Analysts Watch are those who wish to do preliminary research or compare recommendations of their investment counselor with the choices of most analysts.

"One caveat is that you must keep in mind the price-to-earnings ratio of a stock to determine whether its value makes it suitable to buy," said Zacks.

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