3 steps to make the most of earnings season

The new earnings season is finally here, and it’s time to delve deeper into how to best seize the opportunities that come with it.

Earnings season is a time when publicly traded companies open their books to show how they have been doing in the previous 3 months: information that could deeply affect your portfolio. So it’s time to ask ourselves, how to make the most of the earnings season? You have to know yourself, know your stuff and know what’s going on around you. Let’s dig into these steps one by one.

Step 1: Know yourself

Earnings season is an exciting period for everyone involved in the stock market, but it holds a different meaning depending on what your objectives and skills are. The main difference being probably the one between day traders and long-term investors.

While day traders may want to go after any opportunity to gain in the short term by surfing rapid price changes, investors should think carefully and avoid rushing into action just because of a sudden spike or collapse somewhere.

That doesn’t mean closing your doors to unexpected gems that might arise, but being careful not to take big decisions just around those numbers.

Moreover, if you’re in for the long run, you should focus primarily on what’s coming for the shares you own and those that are already on your radar.

Which leads us to…

Step 2: Know your stuff

Before each earnings’s presentation, remember to study the expectations and the consensus among analysts on the shares you are interested in.

We will help with that by keeping you updated with articles that focus on the key data for the most interesting companies, in the week prior to their presentation in our BUX Breakdown.

During earnings’ presentations, especially if you’re into long term investing, you should first wait for the whole data.

The first numbers to come out may not be the most relevant, but only what the companies’ managers and spin doctors think might give the best impression.

Also, the initial reactions by the markets will be mainly caused by the comparison between analysts’ expectations on sales or profits and reality, but that’s just a small part of it all.

What matters more than that and often provides an effect on a longer term is what usually comes at the end: forward guidance, meaning expectations for the future (which could be anything from the following quarter, to the whole year and beyond).

Plus, if you’re following the conference call live on streaming, wait for the final analysts’ questions: that’s where you can see whether the management can provide straightforward answers or if they appear to be holding back, in which case it may be better to steer away from their shares.

After earnings’ presentations: you can go and find independent analysis of the companies’ results, but ideally, you should be able to read those numbers yourself and try to predict the effect they may have on their and other shares.

That’s because one company’s earnings may also affect the shares of their competitors or of any other company that may be related to a specific industry.

Also, you should be aware that each sector has specific key metrics that may go beyond plain “revenues” and “margins”. And newly listed companies may even almost totally ignore those, with analysts focusing instead on everything that’s related to “growth”. For example, for Apple you should watch the iPhone sales or for Tesla, the delivered cars. 

Which leads us to…

Step 3: Know what is going on

Keeping up with the news from the world will allow you to better understand the context in which earnings will land and therefore help you in predicting their consequences.

That means both news from the industries you follow the most and financial news, but also politics and any other big developments, say a pandemic, going on…

Traditionally, the season is opened by the big American Banks (Citigroup, JPMorgan Chase, Bank of America and most others will all present their numbers during this first week). Please check our BUX Breakdown on what you should watch out for in this sector. We will keep you updated!

In the meantime, have a good week on the markets.

This article was written by Giacomo Natali.

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All views, opinions, and analyses in this article should not be read as personal investment advice and individual investors should make their own decisions or seek independent advice. This article has not been prepared in accordance with legal requirements designed to promote the independence of investment research and is considered a marketing communication.