reflect an increase in value by a coefficient that represents a multiplier of the value of
earnings per share; if the forecast indicates slowdown, the earnings multiple will prob-
ably decrease.
There is a lot of science that goes into an estimate of future earnings. The information
that goes into the estimate is very likely influenced by the sentiment of the people
who work on the estimate with regards to the future economic indicators, political
environment, and so on.
The sentiment that is reflected in the earnings forecast calculation will find its way into
the news cycle. When the news regarding the earnings forecast is released to investors, it
will be perceived as material information, especially if it is coming from a reputable and
influential research or media firm. The value of the earnings multiple is affected almost
immediately and the stock price is adjusted to reflect a new valuation.
In today’s online real-time environment, the news that carries material information
affects the sentiment regarding the earnings multiple directly.
The sooner investors recognize that there is a news component embedded in the stock
price the sooner they will arm themselves with the necessary tools that could enable them
to take corrective action if necessary.
4.8 Materiality is near
The main question regarding the value that a particular piece of news brings to the stock
price should be around the materiality of the information contained in the news. If the
news is fresh, preferably delivered in real time as soon as the material information is
made available to the public, the impact on the stock price should be very visible.
The determination of ‘‘materiality’’ of the news story or whether there is material
information within the story that has not been disclosed publicly before is not an easy
task.
The SEC guidance regarding material information is that:
‘‘...the following items are some types of information or events that should be
reviewed carefully to determine whether they are material: (1) earnings information;
(2) mergers, acquisitions, tender offers, joint ventures, or changes in assets; (3) new
products or discoveries, or developments regarding customers or suppliers (e.g., the
acquisition or loss of a contract); (4) changes in control or in management; (5) change
in auditors or auditor notification that the issuer may no longer rely on an auditor’s
audit report; (6) events regarding the issuer’s securities—e.g., defaults on senior
securities, calls of securities for redemption, repurchase plans, stock splits or changes
in dividends, changes to the rights of security holders, public or private sales of
additional securities; and (7) bankruptcies or receiverships.’’
While regulated news carries a preponderance of material information, it is not
impossible that financial news outlets uncover new material information regarding
public businesses trading on the American stock exchanges.
More often than not, though, traditional and new financial news outlets recycle
material information that has already been disclosed while adding a new sentiment
via an opinion piece.
114 Quantifying news: Alternative metrics