Here's Why Hedge Funds are Betting Against Nike After They Beat Wall Street Expectations

December 19, 2013
Here's Why Hedge Funds are Betting Against Nike After They Beat Wall Street Expectations
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Nike ( NKE ) posted their FQ2 2014 earnings after the market closed on Thursday. The American multinational athletic apparel giant beat Wall Street profit expectations by 1 cent per share, but buy side and independent analysts were expecting something completely different and that could be bad news for Nike stock.

The table above shows Nike’s reported earnings per share over the past 7 quarters alongside the Wall Street expectations and the consensus from 33 contributing buy side and independent analysts at Estimize. Nike missed the Estimize consensus by 3c per share Thursday evening.

Over the past 7 quarters the consensus from Estimize has been more accurate in forecasting Nike’s earnings 5 times. By tapping into a wider range of contributors including hedge-fund analysts, asset managers, students, and non professionals we have built a data set that is up to 69.5% more accurate than Wall Street, but more importantly it does a better job of representing the market’s true expectations.

In order to understand how Nike’s stock price will likely react to its reported earnings, it’s crucial to compare their profit numbers to the consensus that best represents the market’s expectations.

Part of the problem with the Wall Street number is a misalignment of incentives, the primary motivation of a sell-side analyst is NOT to be accurate. The accuracy of Wall Street earnings expectations are crippled by a “don’t stray from the herd†mentality. As long as they keep their estimates in-line with one another, then no one can be singled out for poor performance. That’s why we launched Estimize.

At Estimize, we crowd source data from over 3,300  buy side and independent analysts, industry experts, students, and non professionals. Confidence ratings for each user are calculated through algorithms developed by our deep quantitative research which look at correlations between analyst track records and tendencies as they relate to future accuracy. We believe that everyone’s opinion matters, regardless of who they are, where they’re from, or what it says on their business card. Our free platform allows for both buy-side analysts to contribute anonymously and independent researchers and non-professionals to compete with Wall Street, professional investors, and make a name for themselves.

Our quantitative research team made up of former hedge fund analysts have investigated situations where companies beat Wall Street on EPS but fail to live up to the Estimize community’s expectations. Based on our post-earnings research we have found that if you benchmark against the market on average when a firm beats Wall Street but fails to meet the Estimize EPS consensus the stock price tends to drift downward over the next 3 trading days after the market reopens. The stock price may change between when the market closes before the report and when it reopens the next day but that gap is not associated with our post earnings drift in any way.  In this case although Nike beat Wall Street, they missed our EPS consensus. For that reason quantitative hedge funds using our post earnings drift strategy are expecting Nike stock to decline over the next few days and may be going short.

For more information about strategies being used to leverage the Estimize data set check out our whitepaper at . Get access to estimates for Nike published by your Buy Side and Independent analyst peers, and register to create your own estimates by heading over to Estimize now.