For the first time since April of 2007, the number of profit forecasts that have been raised in June was greater than the number that were lowered, according to data collected by JP Morgan Chase (JPM).  There were 896 raised forecasts in comparison to 886 lowered, not a wide margin but net bullish nonetheless.  This comes on the heels of first quarter earnings, where analysts were shown to be overly bearish.  For the second quarter, the scenario has thus far played out the same way, with some 75% of firms beating the Street’s estimates in second quarter reporting.  Wall Street estimates had fallen extremely hard during the second half of 2008, at the fastest pace on record, and analysts are just now starting to bring them back up.

In general, we view analysts estimates as a benchmark and don’t believe that they should receive too much importance.  However, market observers have seen the lift that one analyst’s changing opinion can have on a stock.  For example, look at what happened when Meredith Whitney correctly predicted the earnings blow out by Goldman Sachs (GS) a day prior to their reporting.  The company did not report a single number on that day, but the fact that a superstar analyst was bullish on the company lifted the stock nearly 6%.  As this example illustrates analysts can and do move the market, and the fact that analysts as a group are becoming more bullish could have a substantial effect on the broad market.  According to Bloomberg, consensus Wall Street estimates for full year 2009 profits of S&P 500 firms has increased to $74.55 from $72.54 in May.  The consensus view of analysts puts the forward looking expected price to earnings multiple at about 13.13x.  This not a rich multiple when compared to the 50-year historical average of 16.54x.  If analysts continue to boost estimates for the full year the this valuation metric will likely continue to look attractive.

Wall Street was left looking much too bullish coming into the recession and were forced to rethink their estimates in light of a credit market that had seized up and very difficult environment to forecast.  They dropped profit expectations at the fastest pace ever, with profit estimates lowered on four out five revisions in October 2008. The results have shown that analysts quarterly figures have been too low for the past two quarters, which adds pressure for analysts to lift those estimates as even more encouraging macroeconomic data becomes available (such as today’s new home sales data).  As analysts are getting demonstrably more bullish, are they getting ahead of themselves?  With S&P 500 earnings currently pegged to hit $74.55 for the year, analysts are already predicting a 25% rise from last years’ predicted 2009 earnings figure of $59.80.  That represents the largest increase in earnings projections in 14 years, and more upward revisions are likely on the way.

Looking at consensus analysts estimates and their trends is an inexact science because they are often proven to be on the wrong side.  Recently, we have seen analysts too bullish leading into the downturn, and too bearish as the market has recovered some of its losses.  Some analysts are surely better than others, but overall recently individuals would have done better investing counter to the trends in analyst sentiment.  So far in the second quarter, companies have been coming up a little light on revenue, and yet beating earnings.  Which means analysts have underestimated the amount of cost cutting going on in corporate America.  This is a completely rational thing for companies to do right now, but it does not suggest an overly bullish stance on the market from our view.  If analysts continue to raises estimates to avoid being characterized as overly bearish again, then we would not be the least bit surprised to see them come up on the wrong side of the trend again in the second half.

Deere and Company (DE) reported earnings that were slightly ahead of Wall Street estimates for the second quarter.  EPS came in at $1.11 on net income of $472 million, which represents a 38% decline from last year, but again is better than consensus estimates of $1.07 per share.  Shares appeared to be headed lower in the pre-market trading, but had no trouble recovering as shares were up as much as 5% in Wednesday morning trading on heavy volume.

Deere had missed expectations four straight quarters leading into today, and analysts have become more bearish recently as well.  Consensus estimates had declined steadily from $1.19 per share 90 days ago, as the world’s largest farm equipment and machinery dealer has faced headwinds.  Unfortunately, Deere back-up those declining expectations by lowered guidance for the second time in as many quarters.  The company lowered guidance for the year by 20% after first quarter and now again dropping its net income expectation more than 20% from $1.5 billion to $1.1 billion.  The weakness is expected to come from its construction equipment and lawnmower sales.  Construction and forestry division sales were especially weak in the last quarter falling 55%, as company-wide revenue was off 17% to $6.75 billion.  Deere’s Chairman and CEO Robert Lane said, “Clearly, operations dependent on construction activity and consumer spending are feeling the full impact of the sharp downturn.”

As of our latest report on DE, Ockham has reaffirmed an Undervalued rating on these shares because they are trading well below their normal historical ranges.  The destruction of revenue and earnings is certainly distressing though, and it defies logic that this company is trading higher on the news of further lowered guidance.  However, it is clear now that the market is not being driven by fundamentals as much as investor psychology.  Deere and Company is just the latest to take advantage of the stock rising after beating greatly reduced estimates.

Research has certainly come a long way…

Fortune magazine wrote a great article today comparing the efficacy and accuracy of Wall Street research houses that follow Apple Computer (AAPL) and unpaid Bloggers doing the same thing.  This stems from a gauntlet-style challenge being tossed from the Bloggers to the Pros in the last few days leading up to AAPL’s fourth quarter earnings call.

The table below shows the results, and the full article is here…

Needless to say, the Bloggers kicked the crap out of the “Pros” (and I use that term lightly).  The dark green boxes show where the ratings were closest to the actual numbers, and the orange boxes show where they are furthest.  The Bloggers clearly won and there are a couple of cases where the “Pros” numbers were so far off, they look like they were following RIMM instead.

But I caution those reading this article to save it for posterity.  The reality is that Wall Street analysts have the ability to retroactively change their ratings and earnings estimates.  We have written on this topic before, and we will again in the future, but for now, here is a portion of an abstract that explains the phenomenon…

From: Rewriting History, by Alexander Ljungqvist , Christopher J. Malloy, and Felicia C. Marston; April 16, 2008

Abstract:
We document widespread ex post changes to the historical contents of the I/B/E/S analyst stock recommendations database. Across a sequence of seven downloads of the entire I/B/E/S recommendations database, obtained between 2000 and 2007, we find that between 6,594 (1.6%) and 97,579 (21.7%) of matched observations are different from one download to the next. The changes, which include alterations of recommendation levels, additions and deletions of records, and removal of analyst names, are non-random in nature: They cluster by analyst reputation, brokerage firm size and status, and recommendation boldness. The changes have a large and significant impact on the classification of trading signals and back-tests of three stylized facts: The profitability of trading signals, the profitability of changes in consensus recommendations, and persistence in individual analyst stock-picking ability.