Earnings season on Wall Street is a pivotal time for investors. Every quarter publicly traded companies reveal their financial health and tell shareholders how they performed in the prior three months. Successful investors know how to navigate this volatile landscape effectively. Here are three things successful investors look for during earnings season:
Analyze The Numbers
Successful investors look at the actual numbers and compare them to the same period in prior year. For example, Netflix
NFLX
gapped up over 16% yesterday after reporting earnings. In the quarter ending September 30, 2023, the company earned $3.73/share compared to $3.10/share in the same period last year. That is a 20% growth in earnings and that is one of the reasons for why the stock gapped up so much. Meanwhile, revenue rose by 8% year over year and that was received well. The reason why it is important to analyze the same quarter on a year-over-year basis is because that helps with seasonality. It is well known that retail stocks do well in the fourth quarter and sales dip in the first quarter of each year. So, if you measure Q1 vs Q4 the numbers may not line up properly. However, if you measure Q4 vs Q4 or Q1 vs Q1, it gives you a much cleaner reading.
Estimates:
The second important thing investors look at is how did the company do with respect to estimates. Most companies are covered by analysts on Wall Street. The analysts provide estimates on what they think the company will report. If a company smashes estimates that is a good sign. If the company misses estimates by a mile, all things equal, that is not a good sign. Where the earnings are with respect to estimates is another important thing to look at.
Guidance:
The next thing successful investors look at is guidance. One of the best things to see is a company that beats estimates and raises guidance for a long period of time. Again, all things being equal, that is a bullish sign and bodes well for the future. A note of caution, there are many times when a company lowers guidance and then beats estimates the following period. Apple
AAPL
did that for years. So be careful with guidance it is a delicate game of curbing people’s enthusiasm without over promising.
Market Reaction:
The single most important thing I look for is the market’s reaction to the numbers. Why? Because that tells me what investors are actually doing after earnings are announced. All things being equal, if a stock gaps up it will likely continue to run for the foreseeable future and if it gaps down, it will likely continue to fall. Not always, but that tends to happen, most of the time.
These are just some of the things successful investors look for during earnings season. The broader macro environment is also important to consider as well as other factors based on each person’s strategy.
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