Stocks plunder when companies massage their earnings – Eventually
It's no surprise that companies change their earnings report.
They call them “adjusted earnings.”
For all companies in the S&P 500 they are required to give GAAP (generally accepted accounting principals) figures in their quarterly and yearly reports but the “adjusted earnings” come in in what are called pro-forma results.
When there are large discrepancies in the the GAAP and Pro-forma results, investors see red flags and typically…eventually… the stock price catches up.
“We believe that the best EPS measure for valuation purposes sits somewhere between pro forma and GAAP EPS, where in between varies by company, industry and sector,” wrote Deutsche Bank's David Bianco in December 12 note to clients. “Although pro forma EPS can overstate true EPS, GAAP EPS can understate true EPS.”
But are investors really overlooking GAAP? New research from quantitative analysts at Evercore ISI suggest this may indeed be the case.
The analysts looked at the stock-market performance of companies with unusually large differences between GAAP and pro forma results. A big portion of these lately have come from the hard-hit energy and basic-material sectors, but also draws heavily from other areas, such as health-care and tech.