THEY'VE GOT A SECRET

By Daniel Kadlec

Wall Street has a zillion ways to deal you out. You never got a chance at the Netscape IPO? Of course not: hot stock offerings are reserved for big-bucks investors. Couldn't make sense of Intel's latest gibberish on chip demand next quarter? Sure you couldn't: important details get explained in exclusive conference calls. No matter how small investors try to level the field, it always ends up tilted. Get ready for another uphill climb. In the coming weeks, companies will begin reporting second-quarter results, and some stocks will react in ways that defy logic. Why? They are being moved by a relatively new Wall Street device, the "whisper number." Trust me. This whisper is more exciting than anything a dream date might pant into your ear.

The whisper number is, simply, the most up-to-the-minute Wall Street estimate of what a company will earn in a given quarter. The name derives from the air of secrecy surrounding it. No one puts the number in writing; few admit to even speaking it. Yet there are probably whisper numbers for up to 200 stocks each quarter. They tend to be technology stocks and other hot names such as Nike or Starbucks, where robust earnings are critical to supporting the stock price. Intel seems to have a whisper number in most quarters. There's been one for Microsoft, Netscape and Cisco Systems. Strong candidates this quarter are Dell and Compaq. How do you get the whisper? You don't. Only elite investors get their lobes tickled. The rest of us get the kind of ear nuzzle that Mike Tyson put on Evander Holyfield.

Here's how it works: in the short run, nothing is more critical to a company's stock than how its earnings measure up to Wall Street's expectations. A company may report a phenomenal 50% earnings jump, but if the expectation was for a 60% jump, the stock will get pounded. In the past, individuals were confounded by the contradiction that great results could undermine a stock, mainly because they weren't privy to what was expected. But that all changed a few years ago, when services such as IBES, FirstCall and Zacks Investment Research began packaging their Wall Street estimates for the public.

The playing field was leveled--for about a minute. Along came the whisper number, and now "the official Wall Street estimates aren't worth the paper and ink used to produce them," asserts Chip Morris, manager of the T. Rowe Price Science and Technology fund. The official estimates are systematically understated. The number that matters is the one analysts call in to their best clients as the earnings date draws near. Last April, Intel reported a doubling in earnings and beat the printed estimates by 6%. The stock fell because the whisper number was higher. Stinks, doesn't it? And don't expect the SEC to help with Wall Street's little games. It's watching; so far that's all. But patience can be an effective counterpunch. In the long run, stocks track earnings growth, no matter who's breathing what in whose ear.

Daniel Kadlec is TIME's Wall Street columnist. Reach him at [email protected]