Risky ‘Whisper’ Estimates Have Ear of Information-Hungry Investors

Matt Ruecker logged onto the Web one day this month, and with a couple of clicks changed closely watched profit expectations for a hot technology company by 10%.

The new estimate for software company Citrix Systems, known as the Citrix “whisper” number, hit the Internet the next day, including the Web’s most popular site maintained by Yahoo Inc.

Whisper numbers, which usually are defined as unpublished profit estimates circulating on Wall Street trading desks, are closely watched because companies that fail to meet them often see their share price fall.

The problem in this case was that Ruecker, a 27-year-old individual investor, fabricated the number. Ruecker is an auditor at a big Cincinnati accounting firm and has no special insights into Citrix’s business. His dealings with the company are limited to the purchase of 100 shares of its stock.

“This is just pure manipulation through the Web,” Ruecker said. “It’s scary.”

The experiment by Ruecker, who contacted Reuters to draw attention to the easy change in numbers, was repeated by two Reuters reporters on several technology companies.

Manipulation quickly can turn into financial gain if investors bet on a decline in the share price of a company that misses a whisper that they themselves fabricated. In this age of rapid stock trading and investor nervousness about sky-high equity prices, that situation can cost a company billions of dollars in market value, and line manipulators’ pockets.

Investors increasingly focus on whisper numbers because most U.S. companies beat the “official” analysts’ consensus estimates of market research firms such as First Call/Thomson Financial. Some 72% of big U.S. companies beat First Call’s consensus so far this quarter, up from an average of 56% in the last six years.

Part of the reason is that more companies are guiding analysts’ estimates down in the hope that an upside earnings surprise will lift their stock prices, said Chuck Hill, First Call’s director of research.

As a result, investors are approaching forecasts from brokerage analysts with skepticism. At the same time, whisper numbers are gaining credibility after a joint study by the University of Michigan and Purdue University, published in 1999, found whisper numbers available on the Internet more accurate than analysts’ estimates.

To fill demand from information-hungry online investors, Web sites devoted to whisper numbers have sprung up in recent years. These sites claim a variety of sources for their data, including analysts, company insiders and individual investors, and generally claim to forecast corporate profits more accurately than First Call’s consensus.

But the university study, conducted between 1995 and 1997, did not gauge the accuracy of more recently set up Web sites. And as Ruecker discovered, some of these sites are easy to manipulate.

Ruecker spotted a table on Yahoo (https://www.yahoo.com) that carried a whisper number of a profit of 22 cents a share for Citrix’s first-quarter results, three pennies above the First Call consensus. Skeptical, the auditor than went to the Web site of the table’s source, Whispernumber.com, and checked out the Citrix whisper estimate.

“Right there it said: ‘Enter your number,’ so I clicked on it. Then I registered, entered 18 cents, and all of a sudden it changed to [a new whisper of] 20 cents,” Ruecker said.

The next day, April 19, Citrix reported first-quarter earnings of 21 cents a share, ahead of First Call’s 19 cents, and matching Whispernumber.com’s whisper figure, which had moved up to 21 cents. The company’s stock price on April 20 fell $12.38, or 19%, to $53, amid investor concerns about an increase in customer payments owed to the company, one analyst said.

A few days later, two Reuters reporters logged on to Whispernumber.com and entered their own estimates.

In less than two minutes, they changed the whisper number on a small technology company from a loss of 8 cents a share for the quarter to break even. Reuters reporters then alerted the Web site’s owners to their experiment.

The potential impact of these fabrications was expanded when two major wire services, Reuters and Dow Jones, this month started to carry tables that listed data from Whispernumber.com’s Web site.

Reuters, a unit of London-based news and financial data company Reuters Group, is the biggest provider of news on the Internet. News from Reuters and Dow Jones & Co., which is the publisher of the Wall Street Journal, also reach a huge client base of investment professionals.

But both agencies dropped the estimates after brief trial periods. “We decided to terminate because the method by which the information is collected is inconsistent with our standards for content,” Reuters spokeswoman Nancy Bobrowitz said.

“We stopped because we concluded the estimates they were reporting were not sufficiently restricted to securities professionals,” said Dow Jones spokesman Richard Tofel.

Whispernumber.com’s founders, Paul Hauck and John Scherr, conceded investors can manipulate the Web site’s data. But they said the site still is a good predictor of stock movement, and cited a 60% to 70% accuracy rate.

“There is some trust factor involved; we hope investors come to our site and in good faith provide their analysis,” Scherr said. “You can’t be too naive, though. This is, after all, investment in stocks. That’s why we’re encouraging investors to look at the number of whispers to get a better gauge of whether this is a strong sentiment indicator.”

Whispernumber.com, which started in 1998 and was bought by Fort Lauderdale, Fla.-based Internet Financial Network Co. last year, doesn’t purport to have insider knowledge from analysts or Wall Street professionals, Hauck said. It merely measures sentiments from the millions of Americans who trade stocks online.

“We’re saying there’s a new force out there, a large demographic of online, “new-economy” type of investors,” Hauck said. “When their expectations are met, these investors are happy and prices move higher.”