Why Have Stock Research Analysts?

Apple Computer crushed earnings estimates last night. Was this ever in doubt? We all knew that Apple's numbers would be way above what the mutton head analysts on Wall Street had expected them to make. The estimates were for Apple to hit $5.38 on earnings and $24.3B in revenues. Apple safely beat those numbers and even beat the dreaded whisper numbers.

In short, Apple crushed it. They came in at $6.43 per share on revenues of $26.7B. If you remember last quarter, Apple gave very very conservative guidance of $23B and EPS of $4.80, and the stock sold off pretty nicely.

In the quarter, they sold:

4.13M MACS - up 23%
16.24M IPHONES - up 86%
19.45M IPODS - down 7%
7.33M IPADS

They surprisingly gave better guidance for the upcoming quarter. They now see revenue of $22B vs expectations of $20.9B and eps of $4.90 vs expectations of $4.47. The stock which at one point was down to 326 or so in the morning, rocketed all the way to 357 or so in the after hours before settling in at around 345. Now! We all know that Apple at the rate they are executing will easily beat their own raised expectations, not unless the world blows up in the next few months, but do you actually think the minions on Wall Street will suddenly get it right on Apple? Absolutely not! You see its a game on Wall Street to keep the feed bag going. Understand that the high paid analysts who are tasked with following Apple on a day in and day out manner have a job to do. Their job is to keep the estimated low enough so that when Apple does beat them, they can go out and sell the hell out of it to their sales force. Now of course, every analyst will raise their estimated to where Apple's management has guided to, but not a penny more. You will have a few independent analysts who will aggressively model but by and large the big wire houses will model what management is forecasting. This is again because the wire houses need to keep their best clients which happen to be the biggest hedge and mutual funds in the world happy. Always under estimate and over deliver, or not do your job and rig the game in your favor. This is not shocking behavior and it shouldn't be shocking to anyone who has followed Wall Street for the last 25 years. The small retail investor believes the game is rigged and the Apple earnings announcement is no better example of the shenanigans that occur every day.

What typically happens is this. Apple management typically low balls analyst expectations. They do this for one simple reason. Pressure to perform! They low ball fully knowing that they will beat expectations comfortably. This keeps the analysts and shareholders inline. The analysts will always follow managements lead because after all why upset management by being the lone wolf? The analyst community needs to be in the good graces of management for any type of future investment banking fees. What is also important is that the analyst community is a bridge for Apple to their shareholder base which is every single large mutual and hedge fund in the world.  So what we have here is an analyst community that is incentivize to keep Apple moving in the right direction which is currently vertical. The incentive here is to under estimate so that management looks like they are hitting the ball out of the ball park. All the while the wire houses are collecting commissions from the same shareholder base.

What the Apple earnings announcement basically tells us that:

-Apple is HITTING IT OUT OF THE BALLPARK
-The Shareholders are happy
-The Analyst community continues to add zero value to almost anything.

All you have to do is read the blogs to find out how Apple is doing. Why read MS, GS, or Citigroup's version? There is no better way to read an honest and reliable account of a company's worth then going to a random blog on the subject.

The only reason Wall Street research exists is to feed the supply chain.