Fair question. Because, finance 101 is what everyone else misses, while they are busy acting smart.
The subprime thing was finance 101, anyone who looked at the math like I did in 2003, couldhave known the numbers didn’t work, but they didn’t look (or they did and performed “analyst adjustements” to cover it up). A few years ago I found the fund I worked for was insolvent, I single handedly saved the fund by uncovering that, anyone could have done that, it was finance 101. So why didn’t any of the 160 IQ PHDs notice it? Because they were too busy acting smart, working on complexities, and ignored finance 101.
You guys can keep your cool CFA adjustments. I know all about it, and I know those forward and adjusted-trailing numbers are absolute bullshit. There is HUGE statistical manipulation going on out there, under the disguise of “appropriate analyst adjustments”. That’s why I’m revisiting the solid fundamentals.
^ actually you don’t know all about it. all available data supports AF ex-pa’s stance on P/Es. you’d have much more credibility on this forum if you simply conceded when you’re blatantly wrong. it’s okay, all of us are wrong sometimes.
^ You’re pretty young though dude. Give it time and a few market crashes and maybe you’ll learn…them cool “analyst adjustments” you worship ain’t all that. CFA is a starting point, then you gotta learn to think for yourself.
How come the adjustements are always better than actuals? Never worse? How come the finance 101 numbers (23X P/E, Q3 EPS ttm -14% decline) are never shown? If there is nothing to hide?
PA, aren’t you assuming that company management has no reason to dress up and manipulate their financial statments by classifying things however they want (within the subjectively blurry limitations of GAAP and IASB)?
How can you advocate just taking management’s word on things as presented without looking and adjusting stuff? How is just taking management’s word on things “being objective” and “thinking for yourself”?
Analysts have a different goal than management. They can be wrong, even biased, but surely they have less of an incentive to present the company in a “we make money hand over fist” light than the management does (particularly vs buyside analysts).
To assume that the numbers as they arrive from management’s lips are the objective unbiased reality and thus never require adjustments just seems batty to me.
Yes, I worked in accounting, and I know how GAAP/IAS works. We have to work with the best available numbers, and we have limited time in the day. It’s better manipulated GAAP, than manipulated GAAP PLUS manipulated analyst adjustments. GAAP has rules, analyst adjustments follow no rules.
LOL. Then why do they always project that the company will make money hand over fist?
You guys are really weird sometimes. Do you actually believe the stuff you write? It’s like out of a CFA text book. The numbers out there are totally made up guys. You can’t see that? Did you guys believe the rating agency numbers on CDOs? Yes, there IS a goal. The goal is to keep the music going as long as possible, then stick some dummy with the hot potato. Same as every cycle. Everyone in the industry is incentivized to do this (media, analysts, companies).
Thus if you are going to do adjustments, you need to do every single one of them yourself, none of those analyst numbers out there can be trusted (I’ve spent years making up numbers and know all the tricks when I see them). If you don’t have time to do that, which you don’t, then just use GAAP.
Buyside analysts have no incentive to project that a company makes money hand over fist, unless their calculations actually justify that.
Perhaps you think they do because when the company doesn’t make money hand over fist, they don’t bother to present the investment case (though they might if shorts are allowed).
You seem to think that analyst adjustments always distort management distortions further from “objective reality” than the management distortions alone. But the whole point of the adjustments are to work in opposite directions (though the analysts also adjust things to improve comparability with other companies, when management chooses non-identical accounting treatments among companies).
Sell-side analysts do have an incentive to drive transactions for their company (direct or indirect incentives), so those are often suspect, but experienced buysiders have little or no incentive to distort things.
Yet in reality the adjustments keep boosting even higher, not bringing down. You aren’t going to outperform looking at what everyone else looks at…especially when it’s wrong.
Trailing EPS $90.85, expected 2016 EPS $126.77 (a 40% increase), mmmk. So I guess it’s only 16.5X P/E right now, the analysts said the revenue is coming, stocks are cheap, let’s buy!!
Sorry, you guys are way too theoretical and idealistic for me. I’m going to stay my grounded practical self, and keep banging away with the rock solid actuals that everyone else ignores.
it’s okay everybody. it’s clear that pa thinks that a company that reports zero or negative earnings in a given year is worth nothing. that is what he is fighting for. he thinks that FCX, APA and CHK are all worth nothing. in 2009, he thought every U.S. bank was worth nothing. in 1931, he thought almost every company on the planet was worth nothing. if he wants to sell at bottom and buy at tops, let him be.
I agree with this, PA’s number on TTM S&P earnings are accurate, but if we’re using, or even talking about, historical S&P multiple, then we have to use normalized earnings. If you were to use reported earnings consistently throughout the history, the 10 year S&P multiple would be much higher.
It’s unclear to me what you are trying to say. As reported IS the number we have been using historically, it is THE measure of P/E, we have data going back over a 100 years which is posted below. You can email S&P and talk to them about it. You guys are making this way harder than it is, obviously a lot of confused people out there. Just use real numbers and the confusion will go away, always start with the “finance 101” number so you have a solid foundation and don’t get lost.
Real as reported trailing P/E is currently 23X, the end. Filtering out post-crash distortions, it has only been higher 3 times in the last 100 years. The median P/E right now is the highest since 1950, even higher than the dotcom bubble. These are facts.
and what you’re not realizing pa, is that using trailing P/E is completely useless as a market timing or market valuation indicator as it says the market is expensive at market bottoms and cheap at market tops solely due to a LACK OF WRITE-OFFs AT THE TOP and a GLUT OF WRITE-OFFs AT THE BOTTOM. market tops and market bottoms are the exact moments when you rely on market timing and market valuation the most. i seriously don’t think i can make it any more clear to you.
Yawn, obviously I already know the point you are trying to communicate, you have said it like a million times. You are absolutely obsessed with myopic stuff like writeoffs to the point of ignoring the big picture. You think guys like me didn’t know in 2007 that the earnings were bogus and would come down once they wrote off that junk? That’s why I sold in Q4 '07 noob. Obviously 2009 post-crash distortions of 100X are something we ignore.
I’m not dispurting the facts. Yes, I know what you’re referring to - I just downloaded the file on S&P website and can see that operating earnigns for 2015 are $106.7 and reported earnings are $95.7.
My point is that you have to use this $106.7 operating earnings as THE measure of P/E because that has been the standard that “everyone” used in the industry. This adjustment, right or wrong, has been there the whole time - it’s not like we started using normalized earnings only in recent years.
The analyts estimates are based on this operating earings. You said, probably sarcastically, that analyst are expecting 40% increase in earnings, but I hope you understand that they are not using the reported earnings. Is adjusting earnings a RIGHT methodology? I’d think so. I hate it when I do the models for PMs, but that is the standard used in the industry.
Well actually I don’t have to do that, just because all the idiots do it. I have switched to the standard of as reported earnings.
As the file you downloaded footnotes, as reported earnings is the longest running measure, the original and true measure of earnings. When people say “the long-term avg is 15X” they are talking about as reporting earnings, not some bullshit forward operating earnings that makes expensive stocks look near the historic average. Operating earnings are corrupt, they are used by industry to hit numbers, dupe shareholders, and make stocks look cheap. Sorry, but no thanks noobs.
As Reported earnings represent the longest monitored earnings series available today.
Actual Operating Basic earnings then excludes ‘unusual’ items from that value. Operating income is not defined under GAAP by FASB. This permits individual companies to interpret what is and what is not ‘unusual’. The result is a varied interpretation of items and charges, where the same specific type of charge may be included in Operating earnings for one company and omitted from another.
so instead of using an objective measure that actually helps determine the market’s earnings power and in turn market valuation, like normalized P/E, you opt to use trailing P/E and then SUBJECTIVELY decide when that P/E is useless. so your valuation measure is based on your feelings that given day, and our valuation measure is based on science. congratulations king of analysts. it doesn’t have to be 100x trailing P/E to be useless. it can be 23x and be useless. are you telling me that valuation is binary? the difference between 23x and 19.5x is a BIG difference when it comes to equity valuation. we’re talking about being near the 30 year mean and being over 1 standard deviation from the 30 year mean.
That you guys won’t even admit this unethical behavior is running rampant is pretty sad, and illustrates why “Wall Street” has such a bad reputation. Sure I want to beat people and take their money, but I know I can outperform fair and square with everyone having true information. I don’t need to obfuscate. It’s called real ethics, not “well, I didn’t officially violate the code”. The drift between real earnings and adjusted earnings is known (Associated Press / Capital IQ study). It has been growing during this bull market; the company makes up a second pair of numbers, the “analysts” go along with it. These are huge material differences, and the gap just keeps growing. And we’ve seen this all before, in dotcom.
Analysis is for understanding, and thereby making smart decisions. If you start with manipulated numbers, the analysis is worthless, it just ends up saying what the manipulator wanted it to say – that earnings are great and thus stocks are cheap.
So wouldn’t the distance between analyst estimates and as reported estimates be a useful signal? Also the dispersion in analyst estimates. I read a long time ago how these were used in some quant models, but I forget what the conclusions were.
I can see both sides of the argument on using as-reported or “normailized” eps. Both approaches have issues.
If you were looking at a single company or indystry then normalized eps is certainly the way to go for comparing historical multiples.
The issue I see with normalized eps in this context is that ignoring non-cash charges is like ignoring depreciation. When a company writes down the value of an asset they are essentially accelerating the depreciation. If you accerlerate book depreciation faster than the asset actually depreciates you will eventually be overstating future (book) earnings. As such, since you’re using the aggregate value here I think there is an argument for using as-reported earnings since using “under-reported” earnings from one company (or industry) should offset the use of over-reported earnings from another company (or industry)…