Almost everyone with a voice in the market is chirping about how great earnings season has been. I am one of the few who just doesn’t get it. I keep trying to reconcile the dramatic dumbing down of analyst estimates that took earnings growth from almost 9% at the start of the year to 3.8% at the start of earnings season. Then I throw in the macro environment of slowing economic growth with expectations of more slowdown to come and I am even more disillusioned. For all the years I have been paying attention to earnings estimates, I can never remember a quarter that was so dramatically screwed with. I have to do more work on this topic, but my big question is - “Did the analysts suck so bad or did the companies do so well?”

Whenever anyone quotes the percentage of beats, meets, and misses - I just ignore it. Comparing this earnings season to any other that I can remember just doesn’t seem appropriate. I just was reading some of this crap and saw that 22 of the 30 Dow members have reported, with 16 beating. Beat what? Let me ask you - would they have “beat” the initial estimates that fundamental investors were using in January? If so - great - but would they have still beat when you subtract the shares purchased under a buyback plan?

So here is what I suggest: Evaluate each company in your portfolio and look at what estimates were 90 days ago. When earnings are actually reported, did they beat the original estimate or just the dumbed down current one? If estimates were lowered for reasons that you can clearly understand or if there was some clear downward guidance publicly expressed by the company, then fine. And since EPS can be manipulated relatively easily with share repurchases, how about looking at raw earnings numbers rather than on a per share basis. Lastly, spend a little time looking at top line growth and gross margins. If the company beats estimates but revenue growth is poor and/or gross margins are compressed, please don’t get too excited.

To illustrate this point, I am going to pick on GM (fair or not) because their earnings are reported this week. Here’s a link to their EPS estimate over time. The March 2007 quarter is sitting at 90 cents now but 90 days ago it was at $1.25 (a 28% reduction). Meanwhile, GM’s stock price is within pennies of its value 90 days ago and about 5% higher since the beginning of the year. So when they come out, will they beat 90 cents or $1.25? I know GM has had a lot of weird stuff going on so if you don’t like this example, pick another one.

I am certain that quite a few companies in the S&P beat estimates and lived up to the expectations for revenues and earnings that investors had set at the start of the quarter. However, I am not buying into the hype that this season has been as spectacular as it is being described. Please take a lot of time to evaluate your expectations for each quarter and make sure you know what you are getting. If a company doesn’t hit your personal standards for revenues, margins and earnings, that may not be a reason to sell especially if the stock heads higher. However, it should give you a reason to keep a really close eye on things.