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When a company gives ‘guidance’: An explainer

Paddy Hirsch Apr 17, 2014

Google reported an 11 percent drop in profit this week. And the company’s stock immediately jumped more than one percent in trading.

Hey, hold on a sec – how does that work? How can a company report a big fat loss and then see its stock go up? And how is it that some companies’ shares fall, even though they generate a profit?

It’s all about “expectations.” If a company’s results miss expectations, the stock will usually fall; if the results meet or exceed expectations, the stock will usually rise.

But whose expectations are we talking about here?

That’s right – investors, specifically analysts at the big investment houses, who pore over the company’s filings and news releases and come up with their projection of how the company has performed over the quarter.

No company likes to see its stock go into a tailspin, especially at earnings time, so companies do everything they can to avoid missing expectations. The biggest weapon in their arsenal is something called “guidance;” also known as “managing expectations.”

Guidance is when the company calls up investors ahead of the earnings release and says “Hey chaps, we’ve had a few problems recently. It looks as though our numbers aren’t going to be so good this quarter.”

The analysts factor that into their calculations, and their expectations are lowered. That way, if the company’s results are terrible, no one is surprised. And if the results are really good, then the stock gets a bump.If this sounds like manipulation, well, maybe it is. It’s something that we can all practice in our lives, and it’s a particularly good technique to use when you’re dealing with your finances.

If you think, for example, that you might have problems managing your debt, take a leaf out of the corporate playbook and issue your own guidance to your lender. The better you manage your bank’s expectations, the more likely you are to remain a borrower in good standing.

And there’s nothing wrong with that.

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