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Earnings Season 101

21 July 2015 in Investing Insights

In case you hadn’t noticed, it’s peak earnings season, when the largest number of companies announce their quarterly results. If you are serious about your investments, this is a good time to pay closer attention to investment-related news. An earnings announcement tends to prompt more movement in the respective company’s stock price.

While the contents of earnings announcements are driven by financial results, there’s still enough left open to companies’ interpretation to make it challenging for investors to read critically.

Earnings announcements typically include mandated disclosures plus any other data the company finds strategic to announce. Depending on what source you get this information from—the company itself, a third party news source, or an analyst report—all of the dressing might slow down your reading or divert your attention from seeking to gain an opportunity to buy low or sell high.

Planning ahead for earnings seasons and announcements by companies you follow can help you find the right news faster. Get your calendar out and start preparing for earnings announcements several weeks prior to the hustle and bustle.

Study How Far in Advance a Company Announces Its Earnings Date

The further in advance a company announces its earnings date, the higher the chance the earnings have beaten estimates; so goes the theory by Olivier Dessaint and Romain Boulland in “Announcing the Announcement.” Their research which showed that 80 percent of U.S. listed companies and their earnings announcements between 2007 and 2012.

Companies giving advance notice eight or more days earlier compared to the same quarter of the year prior had an average upside earnings surprise of 0.6 cents per share. Those that announced eight or more days later averaged price drops of 1.4 cents per share.1

Advance notice period

Read Through Consensus Estimates and Formulate Your Own Opinions

In the weeks or days preceding a company’s earnings release, research analysts are busy preparing estimates outlining their predictions of the earnings results. Research firms then compile these forecasts and issue their own consensus estimate. After earnings are released, the actual results are then compared to the consensus estimates. Earnings reports beat, meet, or miss these consensus estimates and the market often reacts rapidly. A few places investors can access consensus estimates include Bloomberg, Zacks Investment Research, Thomson Reuters and Estimize.com.

Good investors can learn to decipher whether there are any deeper messages when comparing results and expectations. Third-party analyst expectations may have more objectivity than the forecasts prepared by management of the company.

Watch for Bad News in Earnings

Be on the lookout for any kind of bad news in earnings, which may lead you to an opportunity to buy low. Examples could include one off-amortization charges, writing off inventory, or conducting other temporary actions that make earnings results look worse than normal.

How Is the Market Reacting to the News?

You might find investment opportunities well after the actual earnings announcement (or at least 24 hours later). If the market overreacts to the news, the resulting stock prices might indicate a time to buy low or sell high. When stock movements that seem to exceed the difference between analysts’ consensus estimates and the results announced by the company, look for possible explanations in other information about the company.

For example, let’s say Apple’s top line and bottom line numbers come in 5 percent below expectations, but the stock declines by 15 percent. There may be an overreaction to the valuation compression that may present a good buying opportunity if the business model is intact. The same can be said for reporting good results and seeing the stock gain much higher than the earnings numbers would warrant.

Pay Attention to Sector Results

Similarly, if a particular company’s earnings contrast with how the rest of the sector has performed, that might indicate a time to buy low or sell high. Look at data on both the sector data and the leader of the sector—or if your stock is the sector leader, look at the runner up’s stock. And look at the performance of the corresponding customer or supplier sector.

For instance, if you own a small semiconductor company, it’s may be helpful to follow Intel and Taiwan Semiconductor’s results to garner clues about the overall health of the industry. If you own a mobile glass manufacturer, it could be helpful to see what Apple and Samsung have to say about mobile demand and inventory.

These ideas are only the beginning, of course. The more you learn how to analyze earnings news, the better the course you might chart for your investing. With that in mind, we are going to continue the topic of earnings season pointers next week.

You should be aware that trying to interpret underlying news, or react to what you perceive as an opportunity based on a market anomaly in pricing entails additional risks you should carefully consider prior to taking market action. Oftentimes, short term swings and increased volatility in prices may not move according to your expectations, which can impact your investment strategy.

1 Dessaint, Olivier and Boulland, Romain, “Announcing the Announcement,” American Economics Association Conference, January 2015, via Linesman, Steve. “Earnings: Why Announcing the Announcement Matters,” CNBC, January 6, 2015.

  1. John
    22 Jul at 10:00 am

    Bummer that Apple disappointed. At least Google finally beat numbers! Netflix too. Wow.

    Reply
  2. jim calocci
    22 Jul at 6:05 pm

    “…we are going to continue the topic of earnings season pointers next week ” . Thank you , I look forward to it ,
    jaycalocci@gmail.com

    Reply
  3. Lizzie
    27 Jul at 8:30 am

    This post is really helpful thanks! I’ve always been a bit confused as to all the things happening during earnings season. That’s interesting what they found out about the timing of “announcing the announcement.” Makes a lot of sense. I’m gonna go take a look at the earnings release calendar now for my portfolio.

    Reply
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