Whisper Numbers: Another Reason to Avoid Earnings Reports – January 02, 2023
BCI Rule: Never write a covered call or sell a cash-secured put if there is an upcoming earnings report prior to contract expiration. All other parameters in our BCI methodology are guidelines, giving the investor some flexibility within the parameters of the system.
Why are earnings reports risky?
- May fall short of consensus estimates (average analyst forecast of company’s earnings and sales)
- May give concerning guidance regarding future earnings and revenue stats
- May not meet the whisper number, the topic of this article
What is the whisper number?
This is the unofficial earnings-per-share forecast of professional traders and fund managers on Wall Street that typically represent high-wealth clients. It may not be the same as consensus estimates. Have you ever seen a company report better-than-expected earnings and sales and offer positive guidance, yet decline in price after the report? I have … many times.
A real-life example with Super Micro Computer, Inc. (Nasdaq: SMCI)
- Background:
- Great run the first half of 2023, huge price growth
- Well positioned in the AI space
- Pre-announced good earnings in late July
- For income traders, high volatility
- Reasonable P/E … lower than the computer industry P/E (price/earnings ratio)
- At least 8 analysts increased their rating and revenue estimates in the run-up…stock was a “Wall Street Darling”
- SMCI has been on and off our BCI premium watchlist since 01/06/23 and failed the week before the earnings release
- Price chart from 5/2/2023 – 8/9/2023
- Note the following:
- From May – beginning of August, SMCI increased in price by > 250%
- SMCI reported earnings on 8/8/2023, after market closed
- The next day (mid-day), SMCI declined by approximately $85.00 per-share or 24% … ouch!
What happened?
You guessed it. A great report that beat market consensus but missed the whisper number. Earnings reports are risky and conservative investors who sell options should be aware of this and trade accordingly. For me, I avoid earnings reports routinely. I learned this lesson years ago after getting hammered too often by disappointing reports.
Discussion
Conservative investors who sell options should strongly consider avoiding earnings reports. Missing consensus estimates concerning guidance and missing the whisper number can lead to substantial losses.
Author: Allan Ellman