More on Earnings

Fundamentals of Market Investing by Adam J. McKee

A critical factor influencing stock price is the company’s earnings, or how profitable the company is (or is not).  Every quarter, the Securities and Exchange Commission (SEC) requires publicly traded companies to release earnings statements that indicate exactly how much the company has profited (or lost) during the prior three months.  These earnings statements are released following the end of each quarter.  The majority of companies report earnings to the public in January, April, July, or October.  As a result, these months are known collectively as earnings seasons.

Earnings reports are important to both short-term and long-term traders, but for different reasons.  Long-term traders want to be sure that the company is doing what it promised to do.  If so, a longer-term trader may deem the investment one to keep in his or her portfolio.  Things are much different for a trader focused on the near-term since price movement can become extremely volatile (we’ll consider volatility in detail in a later section).

A short-term trader may try to anticipate price movement with regard to earnings reports.  This is tricky business for many reasons.  Throughout each quarter, stock analysts try to predict the earnings of publicly traded companies, and their predictions tend to influence stock prices.  The problem is, the analysts aren’t always right (they rarely are precisely correct).  Sometimes a company’s earnings are better than the analysts expected, and sometimes earnings fall short of analyst forecasts.  Even more bewilderingly, analyst expectations are often already priced into the stocks.  This results in a situation where good expectations may have driven the stock price higher (or conversely, poor ones may have pushed it lower) in advance of the actual report.

Still, the rabbit hole goes deeper.  Even if the business does as well as expected, the stock price can still fall.  If numbers are as bad as expected, the stock price might bounce a little.  The logic implies the bad news is known to the world and market participants have moved on to the next quarter.  When you think all of the current mayhem is about the current quarter’s results, the analyst’s projections for next quarter can actually have a bigger impact on the stock’s price.  These myriad elements can come into play as investors react to earnings announcements, and predicting what will happen is next to impossible.  Stock prices usually move after an earnings report.  The most important takeaway is that You can’t capitalize on it (by buying shares) since it is nearly impossible to state the direction (up or down) of the move.

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