Analysts have been a much-maligned group over the past several years, as black sheep such as Henry Blodget and Jack Grubman have tainted the profession. They publicly touted stocks such as Worldcom, while privately shunning them, all in the hopes of winning lucrative investment banking business. While millions of investors were left in the cold, these analysts pocketed millions upon millions of dollars, even after they were fired in ridiculous severance packages. So should suspicious investors pay attention to these analysts? The answer is yes. Here is why.

First of all, analysts can still move the stock market. This alone should warrant investor attention. There is quite a bit of institutional money that gets behind analyst calls on individual stocks and the market as a whole. The big institutions manage trillions of dollars, and often put this ocean of money to work in the market based on what an analyst says.

Also, analysts usually know the companies they cover inside and out. It is their job to be abreast of any new developments and the prospects of their coverage universe. Clearly, the average investor cannot possibly be on top of their holdings to the same degree as the analysts who cover them. This is especially true for investors who are not involved in the financial industry. So, analyst reports can unveil a bevy of educational information about a company. This is quite valuable for an investor.

Even though, an analysts buy/sell recommendations may not be totally objective, there is one item in every analyst report that is extremely valuable: earnings estimates. These are what the analyst believes the company will earn in a given time period. The companys performance is based upon a comparison to this estimate. When earnings exceed the published estimate, the stock usually rallies and vice versa. Stocks can rise or fall 30%+ based on whether or not the estimate is beaten.

The good thing about the analyst estimate is that it is relatively unbiased. The analyst will detail how he comes up with the number in the report, so it is right there for the investor to see. The average of all the analysts estimates on a stock is called the consensus estimate, which is what the companys actual earnings are compared to.

The earnings estimate by itself is important, but the change in direction of it is what really moves stock prices. The changes to earnings estimates or revisions are what get traders juices flowing. Upwardly trending estimates signal that a companys business is enjoying strong earnings momentum and that further share price gains could be in store. The opposite is true when analysts are cutting their estimates. If estimates are rising, a stock that appears expensive now could actually be cheap if analysts raise their numbers high enough. This is a key point to take into consideration.

The takeaway message is that there is value in what analysts do. Rather than pay attention to their buy/sell recommendations, take note when they change a recommendation, because that is what moves stocks. Also, earnings estimates are crucial bits of data that can be extracted from analyst reports. The upward or downward movement of earnings estimates can be a leading indicator of where the stock is going to go.