I finally finished Game of Thrones (GoT). While making my final push and binging the last two seasons, I had so many questions: Which characters are still left? How many dragons are alive? Don’t those two people hate each other? I kept pressing pause to Google recaps and make sure I was up to speed.
I wish earnings season had a pause button.
Four times per year, “Finance Twitter” (or #FinTwit) goes crazy for earnings season. Everyone is asking which companies missed estimates. Which had the biggest beat? Which slipped under the radar?
Following both earnings season and GoT requires diligence, multitasking and a bit of patience. During earnings season, there’s a lot of new information, and it’s important for investors to pay attention. Prices move, dramatically or otherwise, and to take advantage of earnings season and not be drowned by it, it’s critical to be diligent in your earnings announcements analysis.
At my company, an investment research and data analytics platform, we believe there are two routes to take during earnings season:
• Active approach: Do research to speculate on companies that will beat or miss estimates, and buy or sell stocks accordingly — this is often called trading earnings.
• Passive approach: Use earnings season as an opportunity to evaluate your holdings and perform due diligence on your stock positions.
For both approaches, if you stick to the three workflows outlined below, you’ll stand a better chance of finding investment opportunities, maintaining a healthy portfolio and successfully navigating earnings season.
1. Closely track the markets and your key holdings.
The two critical periods during earnings season are speculation trading before a company’s earnings are announced and reaction trading afterward. To avoid scrambling during either period, consolidate all the information you need in one location. Make sure you know when each stock you own is releasing earnings and the benchmarks Wall Street analysts have set for a company’s revenue and earnings per share (EPS) numbers. Since each company’s beat or miss will have implications on your portfolio’s gains or losses, it’s important to know where the yardstick has been placed.
Revenue will give you information on a company’s growth — have sales increased or declined quarter over quarter and year over year? EPS growth indicates how profitable a company is, a coveted metric for value and dividend investors. Top- and bottom-line growth are valuable indications of a healthy company.
The pause button is a great piece of technology for GoT fans. For investors, leveraging technology tools can help you stay in front of announcements and identify which, if any, earnings calls you want to listen in on. Technology can also automate notifications for large price fluctuations and movements in industries of interest. Having all the key information at your fingertips will allow you to make data-driven decisions whether you decide to time your trades or sit on the sidelines.
2. Look for patterns in beats, misses and price action.
People often say the best indicator of future performance is past behavior, so it’s logical to assume that a company with a good track record of beating earnings will continue to do so. (Although, on the other side of the same coin, if you’ve ever read a disclosure statement, you know “past performance is no guarantee of future results.”) Look at your portfolio and evaluate historical EPS in comparison to what analysts had estimated for the stock; Does the company frequently outperform? Does it underperform? Does the stock’s price have a relatively large reaction to earnings?
If you’re trading earnings (or predicting who will end up on the Iron Throne), analyzing historical beat and miss trends is even more important. Repeating an analysis of past earnings announcements for each stock you plan on trading can help you determine which side of a stock you want to be on — in the long term or the short term.
The historical trends will tell part of the story, and earnings announcements will help complete it and can answer the question: Is the company following its historical trend or taking a turn? During earnings announcements, pay attention to:
• Earnings calls: Nearly every word said on the call can impact the stock. One slip-up from the CEO or CFO can cause the stock to move. Listen for both content and tone.
• Earnings guidance: What does management expect moving forward? Are they expecting tough times? This can cause a stock to sell off even if they beat forecasts.
3. Dig into sector and macroeconomic trends.
What are the macroeconomic factors that can impact the stocks you own? Is the industry in decline? Are innovators in the field increasing competition? There can be many factors, which is why it’s important to take some time to research peers/comps of the stocks you’re interested in and see how they’ve performed recently. Use this information to supplement your analysis of the stock in question and draw a more complete picture.
For example, if you are considering buying Chevron Corp. (CVX) ahead of their November 1 earnings announcement, pay close attention to the Valero Energy Corp.’s (VLO) October 24 and ConocoPhillips’ (COP) October 29 releases, as well as the prices of Brent and WTI crude oil. Since the energy sector often responds in unison to fluctuations in oil prices, Chevron’s peers might clue you in to where the industry is trending in the short term.
Earnings season is all about gathering and analyzing information and using it to make decisions. The same goes for Game of Thrones. Publicly traded companies release performance figures, host calls with analysts and issue guidance, while the Starks and Lannisters sometimes tip their hands with cryptic lines or disguised actions. In both, being successful in understanding comes down to how you harness available information to make sure you have the full picture.
