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Why Are Analysts Almost Always Wrong About Apple?

“No matter how much evidence exists that seers do not exist, suckers will pay for the existence of seers.”

– J. Scott Armstrong, “The Seer-Sucker Theory”

Wall Street analysts, the well-paid prognosticators that frequently appear on CNBC and generate headlines with their reports, hold enormous sway over the fortunes of a company (and its shareholders). Why should we, as individual investors, place so much emphasis on what they have to say?

Look at Apple AAPL +214054.37%: analysts like Toni Sacconaghi at Bernstein and Katy Huberty at Morgan Stanley MS +0.2% have outsized influence when it comes to driving its stock price with their reports. Before releasing its earnings report on May 1, Apple stock went down more than 3.5% on April 20 after Huberty predicted that iPhone sales would be more sluggish than expected and the stock would fall post-earnings.

As reported in Barron’s, Huberty’s note “offers more troubling fodder to an increasingly negative news cycle: The iPhone X isn’t the top-seller Apple anticipated, the company is struggling to expand its supply of OLED screens, and demand for its products is weaker in China.”

Sacconaghi had lowered his iPhone shipments estimate from 52 million to 51 million. Bank of America BAC +0.06% Merrill Lynch analyst Wamsi Mohan wrote in a note to clients, “In our opinion, investors are already expecting a weaker CQ2, but the magnitude could be surprising to some.”

So what happened when Apple reported earnings on May 1?

Missing The Mark

iPhone shipments were 52.2 million (led by the top-selling iPhone X), revenue in China increased by 21% and Apple announced a 16% dividend increase and a $100 billion share repurchase program. The stock went from $166.90 on the date of Huberty’s report to an all-time high of $190.37 last week.

Analysts are paid millions of dollars a year, their firms have the most expensive algorithms and predictive models and yet, they consistently miss the mark with their predictions. The market, however, responds to these reports as if they were gospel.

Analysts are prone to groupthink — once one analyst changes their rating or price target, others quickly follow suit. Oftentimes, this happens after a company surprises with an earnings beat or news about the company is released. At this point, the market has already priced the news into the stock.

Spencer Jakab, a former analyst for Credit Suisse and currently a writer for the Wall Street Journal, wrote about his former profession, “Analysts are, as a group at least, like the farmer who bolts the barn door after the horse has run into the meadow.”

When the stock drops based on an analyst’s report, the markets may be overreacting to misleading or false data. As long-term investors, these drops may be hard to swallow, and we’re subjected to them on a quarterly basis. Analysts publish their earnings expectations and a company’s stock is affected by whether or not they meet those expectations. There is limited focus on the long-term outlook, and the analysts typically have no accountability for frequently missing their estimates.

Perhaps betting against analyst reports might be a good contrarian play. One prominent investor who clearly doesn’t agree with analysts: Warren Buffett, who increased Berkshire Hathaway's BRK.B +0% stake in Apple by 75 million shares last quarter.

“The idea that you’re going to spend loads of time trying to guess how many iPhone X … are going to be sold in a three-month period totally misses the point,” Buffett told CNBC. “Nobody buys a farm based on whether they think it’s going to rain next year,” he added. “They buy it because they think it’s a good investment over 10 or 20 years.”