David Einhorn: The New Game is ‘Beat and Lower’

This is an ongoing earnings season phenomenon that many have picked up on but David Einhorn expresses it best in his quarterly letter to shareholders (via ValueWalk):

During the first few years of the market recovery, the formula for higher stock prices was “beat estimates and raise guidance.” Not anymore. Now it’s enough to beat the current quarter, and make it easier to beat the next one too by simultaneously lowering forward expectations. “Beat and Raise” has become “Beat and Lower” and seems just as effective at driving stocks higher. Indeed, in the recent quarter, 70% of companies in the S&P 500 “beat” the official street estimates, while forward estimates fell for roughly the same percentage of companies. At this point in the cycle, lowering the bar seems to be treated as bullish because it increases the likelihood of future earnings beats.

This is a stupid game and may continue for another quarter or two but certainly not forever. A little top-line growth would be nice at some point before I’m being cared for in a nursing home.


Greenlight Capital Q2 2013 Shareholder Letter (Scribd)


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