For many months, I've pointed out the negative trend in earnings estimate revisions for the financial sector. However, I realize it's one thing to tell you that our system worked and another for you to see the same results. Therefore, this week, I'm going to go over the warning signals, as they occurred, for each of the aforementioned stocks. And I'm going to use data that is available - for free - on Zacks.com.

AIG Forewarned Investors of Problems

Last February, in this column, I discussed how AIG warned about growing subprime-related losses. The firm revealed in a SEC filing that its internal model underestimated losses for two of its subsidiaries. The firm said new calculations suggested a potential loss of $5 billion, instead of $1.6 billion.

Brokerage analysts had previously started cutting their 2008 earnings estimates prior to the announcement, so investors should have been cautious about the stock. The announcement gave an additional reason to stay out of the stock. What followed was a rapid decline in expectations for AIG and a corresponding plunge in the stock's price.

Late Tuesday night, the Fed threw AIG a lifeline. The Federal Reserve is loaning the soon-to-be former Dow component $85 billion at interest rates that are equivalent to what many credit cards charge. For more information about the buyout, read my post on our Tale of the Tape Blog.

Reversal of Trend for Lehman

Until last fall, there had been a history of positive estimate revisions for Lehman Brothers. This trend had lasted for several years, before completely reversing.

To explain this trend, I'm going to show you the Price & Consensus chart for LEH. This chart shows the trend in estimate revisions and movement in a stock's price. Changes in earnings estimates are the shorter multi-color lines. The longer, continuous black line shows how Lehman's stock has traded.

What I like to see is an upward trend in estimate revisions and a corresponding move in the stock's price. This is what occurred with LEH between late 2003 and early 2008.

Starting in the summer, estimates for 2007 and 2008 started to weaken.

Then, throughout this year, forecasts for 2008 were continuously and sharply revised downward. As the outlook for Lehman worsened, its stock entered into a freefall. At any point last fall or winter, an investor looking at this chart would have had a big warning signal to get out of LEH.

A Lackluster History for Washington Mutual

What's interesting about Washington Mutual is that even when times were good, the stock never really rewarded shareholders. Between late 2003 and early 2007, there was not a meaningful difference in return between WM and a S&P 500 index fund.

The reason is that the company missed earnings expectations on several occasions, as the Price EPS Surprise chart shows.

The nearly routine negative surprises kept brokerage analysts from having much confidence in their earnings forecasts. As a result, even when the housing market in California was booming, the positive business momentum was not resulting in upwardly revised profit projections.

Conversely, when industry conditions turned against WaMu, brokerage analysts began cutting their forecasts en masse. After all, if a company failed to live up to expectations when times were good, it certainly isn't going to meet expectations when times are bad.

Lesson for Investors

Not all companies with negative estimate revisions will become the subject of bankruptcy rumors. However, many will disappoint and cost investors money. Given that all of the above information is available for free on Zacks.com, there is no reason for investors to ignore warning signs.

Though investing is often defined in terms of how one much makes, limiting losses also materially improves portfolio performance.

Positive Plays within the Financial Sector

Regular readers of this column know that I've been bearish on the financial sector since last year. The reason is that earnings estimates for the entire sector continue to be cut for both 2008 and 2009. Still, brokerage analysts are raising estimates on some financial companies.

One such company is American Financial Group (AFG). Earnings estimates on this property and casualty (P&C) insurer continue to be revised higher for both 2008 and 2009. AFG has topped expectations nearly every quarter over the past five years, disappointing investors just twice. Best of all, the stock trades at about 7.5x 2009 earnings.

Northern Trust (NTRS) may not seem like much of a bargain with its stock trading near a 52-week high. However, the company has a history of meeting or beating earnings estimates. Furthermore, profit projections for this year and next are being revised higher. NTRS provides asset management and investment advice to institutional investors and high net worth individuals.

Shown below is the Zacks Sector Rank List, which shows the trend in estimate revisions on a broader scale.

Charles Rotblut, CFA, is the senior market analyst for Zacks.com. He can be reached at crotblut@zacks.com.