Watching the Whispers: Companies Hit Numbers, but the Wrong Ones

Whisper numbers are once again all the rage as earnings loom.
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How about that kid in The Sixth Sense? What was the deal with the whispering dead people?

If the success of that movie taught us anything (other than that a good secret

can

be kept), it's that whispers can kill.

Ask

Yahoo!

(YHOO)

.

The whisper number threatened to squash the Internet giant's signature exclamation mark, as the company's stock slid Thursday after it beat analyst expectations Wednesday, but fell short of its so-called whisper number.

Yahoo! ended off 11 9/16, or 7%, to 154, after the company failed to match its record of surpassing earnings expectations by a wide margin. The Internet portal posted first-quarter earnings of 10 cents a share, a penny better than the official 24-analyst forecast, but "missing" the rumored estimate of 11 cents.

Official earnings estimates are compiled by Wall Street mainstay

First Call/Thomson Financial

, which calculates a consensus estimate based on the detailed financial data submitted by analysts who cover the company. Whisper numbers, on the other hand, are earnings predictions sometimes based on historical earnings patterns and sometimes the result of rumor and/or speculation.

Ten years ago, whisper numbers were little gems of information that an analyst would save for his best clients. But with the growth of Internet chat rooms and online trading, whisper numbers have moved into the mainstream, often accounting for sharp swings in individual stock prices on the heels of earnings reports.

While whispers have been discounted by larger investors based on their dubious origins, they have been embraced by individual investors, who are lured by the gossipy nature of the talk.

"The growing importance of whisper numbers came about with the growing base of individual investors," said Youssef Squali, an Internet analyst at

ING Barings

. "When it was mostly institutional, First Call ruled, but now investors are using the Internet and chat rooms" to get what they think is better information on a company, he added.

Web sites devoted to whisper numbers have cropped up in the last several years, lending more credence to the unofficial numbers.

WhisperNumbers.com

culls its estimates from 200,000 Internet message boards and comments posted by visitors to their site.

In response, First Call introduced its own version of these numbers, dubbed Hisper, an acronym that stands for HIStorical SurPrise-based EaRnings, based on a company's historical earnings patterns. For instance, if a company has a history of beating quarterly estimates by an average of 3 cents, First Call will use that to calculate its Hisper estimate.

John Scherr, the co-founder of WhisperNumber.com, believes he is providing investors with an "unbiased" insight into a company's financial results.

"How do you use a consensus number to make a better-informed investment decision? How do companies manage expectations and analysts? Are analysts analyzing or are they just reporting what they get?" he asked, questioning if analysts get "limited info from the company."

According to Scherr, his Web site reports a 60% to 70% accuracy rate of predicting stock movements in the short term.

Oh, No You Don't!

Chuck Hill, director of research at First Call, takes issue with the whisper Web sites' claims and methodology.

"I don't have any quibble with these Web sites if they are analyzing historical patterns, but if they are picking them off the Web site, you open the door for people to manipulate it. Hey, buyer beware," said Hill.

Yahoo! isn't the only company victimized by whispers in the dark.

Qualcomm

(QCOM) - Get Report

also fell victim to the whisper of higher expectations in January when, after reporting its fiscal first-quarter earnings, fell more than 10 points in after-hours trading. The company had beat the consensus estimate by a penny but missed the whisper number.

"The whisper game is a game of posturing. People on the long and short side will play with perception," said Tim Albright, an analyst with

Salomon Smith Barney

, adding that fast money is more sensitive to whisper rumors while long-term institutional investors regard whispers as static and white noise.

Others believe that companies manipulate their earnings forecasts by low-balling information they disclose to analysts, only to turn around and surprise the market with better-than-expected results.

"Are there some companies and analysts that do this?" asks Hill. "Unfortunately, yes." Companies that consistently beat earnings expectations sometimes do so by default and sometimes by design, he noted.

But, like it or not, whisper estimates are developing a louder voice in the market. "I don't know if you can ever eliminate

whisper numbers completely. You can't control what the rumor mill is going to do," added Hill.

Especially this time of year.