What Is Sandbagging?

Sandbagging is a strategy of lowering the expectations of a company or an individual's strengths and core competencies, in order to produce relatively greater-than-anticipated results.

In a business context, sandbagging is most often seen when a company's top brass shrewdly tempers the expectations of its shareholders by producing guidance that is well below what they know will be realistically achievable. In other words: management personnel low-ball projected earnings and other performance indicators.

Consequently, when the company achieves better-than-expected results, investors are significantly more impressed and more grateful than they would have been if the company had merely met the less-than-stellar expectations.

How Sandbagging Works

Sandbagging has become commonplace in the world of forward guidance when it comes to the declaration of expected revenues and earnings. As a result, the response of investors is often more muted than it once was, because investors are becoming wise to this practice and are thus less knee-jerk reactionary to these announcements.

In some cases, sandbagging backfires because investors call the bluff of those doing the sandbagging and, consequently, anticipate the outperformance that the sandbaggers were attempting to cloak. Because of this, sometimes a stock price falls because earnings failed to exceed expectations by the amounts investors had expected.

Example of a Sandbag

Imagine that Orange Inc. has gained a reputation for being a straight shooter—and not for being a sandbagger—in its practice of providing guidance on quarterly results. During the last quarter, the company declared that it was likely to post modest growth in sales and earnings. Analysts and pundits alike are confident that the upcoming quarterly numbers will be uneventful. But when results were released, they are higher than the consensus estimate, resulting in analyst upgrades and positive press coverage.

[Important: Sandbagging can be viewed as a sign of disrespect in certain circles, and so those who attempt it should be aware of the potentially confrontational ramifications of their actions.]

Now imagine the aforementioned scenario, but with a company that has gained a reputation for sandbagging. In this case, the stock price would likely be largely unaffected by the better-than-expected quarterly results. The takeaway from these two examples is that sandbagging has a limited effect when it is overly employed because investors are quick to catch on to this practice.

Other Common Contexts of Sandbagging

The phenomenon of sandbagging isn't merely restricted to earnings guidance reports delivered by publicly-traded companies. It is also used in recreational activities where betting is frequently involved. For example, a pool shark may deliberately shoot a game poorly, when he encounters a new player, who is unaware of his actual skills. This might entice the new player to accept bigger betting stakes, which turns out to be a bad move when the pool shark reveals his actual prowess.

Key Takeaways

  • The word “sandbag” describes a strategy of low-balling the expectations of a company or an individual’s strengths and core competencies so that even modestly positive gains take on greater weight.
  • In investing, sandbagging is most often seen when a company's management issues earning’s guidance well below what they can realistically achieve.
  • Sandbagging also applies to sports and recreational activities, like when a pool shark deliberately shoot a game poorly to entice competition.

Sandbagging can also be used by a poker player who initially plays losing hands to trick the other players into believing that his game isn't finessed enough to pose a legitimate competitive threat. In racing, sandbagging refers to deliberately qualifying slower than the speed a car can actually perform, so that the driver falsely earns a placement advantage in the lineup.