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Bear of the Day

Cloud and "big data" stocks took a big hit starting in Q1 with names like Tableau Software (DATA - Snapshot Report) dropping nearly 50% from February to May. But is there any way that investors could have seen this "fall from the clouds" coming?

For investors in Splunk (SPLK - Snapshot Report) shares, there was one clear warning sign on March 5 when the stock was trading $92. That's when SPLK became a Zacks #5 Rank Strong Sell. And since then, the stock has consistently been a #5 or #4 Rank Sell. This week is no exception as shares have been cut in half since March.

How Did the Rank Predict the Kerplunk in Splunk?

Splunk provides a software platform, which collects and indexes data and enables users to search, correlate, analyze, monitor and report on this data, all in real time. Sounds like a red hot, growing area of Technology.

But the Zacks Rank doesn't care how exciting the industry is or how great the company's story is. It's a quantitative model that only focuses on one thing: Earnings Estimate Revisions (EER) from Wall Street analysts. When the analysts are raising estimates sufficiently, a stock can earn a Zacks #1 or #2 Rank or Strong Buy or Buy, respectively.

When EER are headed up, a stock's price usually follows. And when EER are headed down, they lead stock prices lower. Here's a look at what's happened in SPLK shares since estimates took a dive and make it a #4 or #5 Rank...

The February earnings report (4QFY14) that shifted the Zacks Rank to a #5 Strong Sell was accompanied by a big miss in expectations when the company reported a GAAP loss of $0.27 for the quarter vs. the consensus of -$0.07.

Then the May report (1QFY15) delivered a whopping 600% EPS miss with a GAAP loss of $0.42 vs. expectations of only -$0.06. Clearly, even Wall Street analyst expectations for the company were fooled again, as you can see in the chart above when they had to drastically reduced estimates again last month.

The turnaround in Splunk shares may be around the corner. But let the Zacks Rank tell you when the best predictor of stock prices -- Earnings Estimate Revisions -- has upgraded the outlook.

Kevin Cook is a Senior Stock Strategist for Zacks where he runs the Follow The Money portfolio.