Earnings overview

The past few months have been filled with earnings calls and happy and sad surprises! While the price of stable stocks like Procter & Gamble or Visa do not move all that much during a short period of time (weeks), this tends to change when their quarterly earnings call comes around.

Every publicly traded company is subject to an earnings call every fiscal quarter (four times a year). No matter how stable a company’s stock price has been over time, earnings results can push the price considerably upwards or downwards. Needless to say, an investor needs to approach earnings as unemotionally as possible. Therefore, it is important to invest in companies that you do not mind having a bad quarter once in a while.

Earnings are somewhat unpredictable; this is why you have to buy companies that you don’t mind taking that wild ride with.

the earnings process

As a company’s earnings call is approaching, analysts from banks, hedge funds and other financial institutions estimate how much a company earned in the past quarter. After all of these agencies put in their two cents, there is a general consensus formed regarding how much the company earned by the standard metric of “EPS” or earnings per share.

On the day of the company’s scheduled earnings call (which is typically available for everyone to listen to) the company presents its numbers and either beats the analysts estimates or falls short (or performs as expected).

Even if a company reports modest earnings (slightly above estimates), the stock price can stagnate or even fall; the more hype before earnings, the harder it is for the company to impress everyone. This is why you should not merely speculate and buy stock for the sole purpose of profiting from upcoming earnings only to sell the stock shortly thereafter for a risky, small potential gain. You should not buy companies based on earnings nor should you sell on that basis; you will get burned.

my philosophy

Every time I buy a stock it is because I am confident in holding shares for the rest of my life. Nowadays if I put any money in the market it’s because the stock of a company I already have shares in goes down (usually when the market has a bad day); this is a testament to the long term confidence I have in the companies I own. If Apple has poor earnings results compared to The Street’s estimate, my first thought is to buy a share or two while the stock tumbles (unless the earnings miss is caused by a fundamental problem that effects the long term efficacy of the company). I know Apple will be around for a long time and that I’ll keep using their products so I am not too worried about their future.

being emotionless both ways

This is the hardest yet most crucial part. Do not feel smart when the stock you own crushes its earnings; at the same time, do not feel dumb when it misses earnings. You did not invest in that company just for the earnings session; you invested because your due diligence said it would perform well over the long run.

I hardly know when the stocks I own are having their earnings calls; that’s how confident I am in them producing solid and stable long term results. What’s one sour earnings call in the span of three years, twenty years etc…

When the company has great earnings, realize that you’re not a stock genius. The company was doing what it is supposed to do; providing shareholders returns for their investment.

this is why you do due diligence

It all comes back to your initial research. Yes, Apple is a company that many are confident in and we all expect them to be around for ages to come. However, as an investor you are still responsible for doing your own research (not just believe what an analyst or two might say). Is the company as financially stable as they are made out to be? Is the company’s leadership taking the company in a direction that you agree with? What is preventing the stock price from ticking up? Are there looming macroeconomic threats to that company (ie. tariffs)?

other considerations

Earnings is a stressful time for stocks. An often overlooked issue is that companies in the same sector can have earnings the same day or week as their peers which can be problematic. For instance, if Disney and Netflix have their earnings on the same day and Netflix falls short of earnings right before Disney’s call, Netflix’s shortcoming could cause Disney’s stock price to fall even if they blow their earnings out of the water.

conclusion

What is my technique for trading earnings? Nothing. I try my best to invest in stocks that I don’t need to watch or keep tabs on. One earnings miss here or an earnings beat there doesn’t historically matter over time. While some traders who love the adrenaline of betting on the direction of a stock will chase earnings, I do not. That is stressful and time consuming. The best portfolio (especially during times of volatility) is one seldom watched.

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Stay informed and take the hint