Before discussing how the Estimates Trend table can help you reach an investment decision, let's look at the reasons why estimates are revised.

• Changing expectations about the economic environment: As economists raise their expectations about the performance of the economy, analysts are likely to raise their estimates of corporate EPS. The more cyclical a company's business is, the greater the likely extent of any upward EPS estimate revision. The reverse, lower estimates, would occur if economists forecasted a slowing in economic activity. Similarly, changes in expectations for different aspects of the economy could affect estimates pertaining to some companies. For example, changing interest rate forecasts would have an impact on estimates for companies in the financial sector, and other interest-sensitive businesses (such as housing); revised expectations for commodity prices would affect EPS estimates for Food Processing companies and Restaurants.
  
  
• Changing expectations about a company's markets: In the late 1970s, analysts covering Broadcasters devoted considerable attention to factors that were likely to influence demand for commercial advertising. That was the primary determinant of revenues (along with whatever impact inflation had on ad rates). Today, even if analysts could be equally certain of their ability to estimate the dollar amount that would be spent on such advertising, they'd have other vital market-oriented issues to assess. How much of the television advertising pie would go to broadcasters and how much would go to cable networks? How valuable is any television program as an advertising vehicle considering that audiences have so many more options (i.e., can a successful network program in 1999 hope to capture the same number of "eyeballs" as a comparably successful telecast in 1979)? To what extent is the internet siphoning away eyeballs and ad dollars that might once have gone to network television? Etc. As you can see, even with no changes whatsoever in economic expectations, changing markets have given analysts covering Broadcast stocks many new things about which they must think and worry. Note, too, that changing markets isn't just an internet phenomenon. The political climate surrounding health care needs to be factored into estimates for those stocks. Increased energy efficiency has played a major role in revised earnings expectations in that sector. Politics surrounding nuclear energy and deregulation compete with weather conditions for prominence on utility analysts' checklists of concerns. Etc. The examples here show issues that have come about gradually. But changing markets can also affect quarter-to-quarter analyst expectations. Case in point: it's reasonable to assume that retail analysts today are carefully assessing e-commerce as threats to and opportunities for traditional retailers. Indeed, at the May, 1999 Berkshire Hathaway annual meeting, Warren Buffett made it clear that he's doing this.
  
  
• Changes that are unique to individual companies: Corporate strategies change. So, too, does the extent to which management succeeds in executing business plans. New information along these lines requires analysts to modify earnings estimates.
  
  
• Changes in how analysts assess the information available to them: As important as the three aforementioned factors are, perhaps the single most frequent source of estimate revisions is the corporate earnings announcement (or anticipatory "pre-announcement) itself. However skilled and diligent members of the financial community may be, analysts can never be sure their estimates are on target. And the corporate executives who "guide" analysts toward their estimates are plagued by many of the same uncertainties that affect Wall Street. (How many banking executives truly know exactly where interest rates will go in the next quarter or year? How many retailers can say, in June, exactly how strong the upcoming holiday selling season will be?) Interim earnings reports and pre-announcements, are important sources of feedback that help corporate executives and investment analysts fine tune their assessments of how the economy and various markets are performing and how much money companies will make under those conditions.

By now, it should be apparent that Estimate Revisions are a fact of life. You cannot reasonably expect to construct an equity portfolio that is immune to corporate earnings surprises. Instead, you should try to identify and own shares of companies that are most likely to have favorable surprises, or at least avoid those that seem vulnerable to major negative surprises.

The Estimates Trend table helps you do this. If the table shows that estimates have been increasing over time, that means that analysts have been surprised for the better. Sometimes, the surprise surfaces in a formal manner, through an official corporate earnings release or through a pre-announcement in which analysts are guided to revise their estimates. At other times, the surprise surfaces in an informal way; i.e. when an analyst gets information—whether from management or another source—showing him/her that estimates need to be changed. Either way, upward trending estimates show a recent history of favorable surprises. Conversely, downward trending estimates show a recent history of negative surprises (formal and/or informal).

Bear in mind that the information presented here took place in the past. One can never be certain that the future will always continue along the same lines. So there is a risk/reward balancing that needs to be done. The longer a particular trend is in place, the more aggressive the stock is likely to react should that trend ever reverse. For example, a negative earnings surprise is likely to have a more dramatic affect on a company with a long history of favorable surprises, especially if the surprises are big, than would be the case if analysts had previously become accustomed to receiving occasional bad news.