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What Does It Mean for a Company to Sandbag?
Understand why a company may underestimate its performance
In the investment world, sandbagging is a strategy where a company will lower its expectations by producing forward guidance that is well below its typical performance. Why might a company choose to sandbag? A company may want to sandbag due to a significant event occurring that they have no control of and will likely reduce their productivity and ability to produce revenue.
Sandbagging is something several companies did last year at the beginning of the pandemic. Although the pandemic did have its effects, many of those companies still went on to have “strong” performing quarters due to the lower expectations they created for themselves. Let’s further jump into sandbagging to understand it even more.
Even though the start of the pandemic last year was an acceptable reason for companies to sandbag, sandbagging has grown common in the investment world when it comes to a company providing its forward guidance. Analysts on Wall Street and investors from all scopes have started to become more skeptical of the practice of sandbagging.
Let’s say a company has started the trend of sandbagging their forward guidance in Q1 every year over the last four years, knowing that they typically have their strongest performance in Q2 and Q3 every year due to the nature of their business. That will raise a red flag for both analysts and investors. Analysts and investors will likely start to ignore the sandbagging, and the company may start to be held to higher expectations.
Sandbagging is a fair practice a company can deploy to provide honesty to analysts and its investors that underlying events in the world will impact its business. When it is abused, it leads to skepticism. When it comes to making your investments, you should be conscious of any companies you are looking to invest in or currently hold that use sandbagging as a tactic. In becoming understanding of sandbagging, you are further expanding your investment knowledge.
