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WHISPER NUMBERS <br> UNOFFICIAL EARNING FORECASTS SOMETIMES MEAN MORE THAN ANALYST'S PROJECTIONS

When Wall Street whispers, investors listen.

At a time when it's no longer good enough for a company's profits to simply go up -- they have to match or do better than what the analysts who follow the stock are expecting -- firms now have another hurdle to get over.

They're called "whisper numbers" and they're the unofficial earnings forecasts that are circulating on Wall Street trading desks, in Internet chat rooms and among influential investors.

They've become a powerful force on Wall Street, especially among high-flying technology stocks.

Consider what happened last month with Microsoft Corp. stock. The software giant reported profits that handily topped the average analysts' estimates. Normally, surprisingly strong earnings would push a company's share price higher. But not Microsoft. Its shares tumbled by more than 7 percent the day its earnings were announced.

Part of the reason was slower-than-expected sales to businesses and a warning that revenue growth would slow over the next six months. But there was another, quieter culprit behind Microsoft's tumble: It's earnings of 47 cents per share fell two pennies short of Microsoft's whisper forecast.

In fact, industry experts agree that whisper numbers can move stock prices, at least in the short run.

"Wall Street has made them important, so they have relevance," says William A. O'Loughlin Jr., a senior vice president at McDonald Investments in Amherst. "In the very short term, they can and do make a difference. They're important for investors with a gun-slinger mentality."

And that's where the danger lies for most individual investors, who should be thinking about a stocks prospects two or three years out, not two or three days from now, O'Loughlin warns.

"I don't put much credence in them because our approach here is to focus on long-term growth stocks," says Gregory E. Frye, the executive vice president of Niagara Investment Advisors, a Buffalo investment advisory firm. "They really are a short-term consideration."

That may be so, but whisper numbers also are gaining respect among investors because a pair of recent studies have found that those forecasts tend to be more accurate than the consensus estimates gathered by market research firms like First Call/Thomson Financial and I/B/E/S International.

"Whispers are more accurate than analyst consensus forecasts," says M. Daniel Beneish, a former University at Buffalo professor who, with two other Midwestern university professors, did some of the first academic research into whisper numbers.

Beneish, who now teaches at Indiana University, concedes that the 1998 study was done when whisper numbers were just gaining credibility. The professors' research gathered their whisper numbers from Internet message boards, along with estimates published in newspapers and on financial newswires. The study did not measure the accuracy of the whisper numbers published on a host of new Web sites devoted to those unofficial forecasts.

Another study of 101 high-tech companies, conducted last summer by Bloomberg News, also found that whisper numbers tended to be more accurate. The Bloomberg survey found that whisper numbers were off by an average of 21 percent, while consensus forecasts missed the mark by an average of 44 percent.

Beneish says one reason why whisper numbers tend to be more accurate is that they often are more recent than the consensus forecasts. Beneish's research found that just shy of half of the published analyst estimates used to calcuate the consensus forecast were issued just days after that particular company released its earnings for the previous quarter.

Part of the problem with the consensus estimates is that companies have gotten good at managing expectations in recent years.

Because stocks tend to rise when they beat expectations but fall when earnings come up short, executives often do their best to guide analysts toward setting targets that they can easily beat, or at worst, match.

As a result, Beneish's research found that the consensus estimates tended to be too pessimistic, while the whisper numbers often were too optimistic.

That also helps explain how two-thirds of the companies in the Standard & Poor's 500 that have reported their fourth-quarter earnings have beaten expectations. Likewise, 61 percent of the small companies in the S&P 600 index topped expectations, according to First Call. The companies in both indexes are reporting earnings that are running about 6 percent above expectations, First Call says.

But if you are a day trader or someone who likes to buy and sell in a hurry, whisper numbers can be the foundation of a sound trading strategy, Beneish says.

The key is to buy the stocks of companies where the whisper number is higher than the consensus forecast and to sell those where the whispers are below the consensus. If investors do that over a five-day trading period before the company's earnings announcement, they can expect to earn 1.5 percent to 2 percent above the market's return, Beneish says.

"If you're an active trader, then I think the whispers would be most useful when the unofficial forecast is below the consensus," Beneish says. "Then I would get rid of that stock."

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