Sandbag: Definition and Examples in Business and Finance

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 lowball 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.

Understanding Sandbagging

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. Analyst valuations can take into consideration the practice of sandbagging if it has occurred often.

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.

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 they encounter a new player who is unaware of their 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 their actual prowess.

Sandbagging can also be used by a poker player who initially plays losing hands to trick the other players into believing that their 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.

Sandbagging can be executed in any circumstance wherein the individual purposely makes themself appear less skillful than they otherwise are in order to gain an advantage in the future. It is not illegal but is seen as a dishonest way to conduct oneself.

Example of Sandbagging

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 are released, they are higher than the consensus estimate, resulting in analyst upgrades and positive press coverage.

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 continuous sandbagging has been taken into analyst valuations. 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.