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Highlights
- Earnings season is considered as one of the most critical periods during a financial year for stock markets.
- During this period, publicly traded companies release their quarterly reports.
- The significance of the financial reports can be understood from the fact that a company’s stock price movements depend on how its financial numbers shape up.
Earnings season is considered as one of the most critical periods during a financial year for stock markets. During this period, publicly traded companies release their quarterly reports, which encompass their financial results (profit, revenue etc.) and guidance estimates.
Analysts use these reports to determine how the company fared in the past and what it can deliver the future. The significance of the financial reports can be understood from the fact that a company’s stock prices go up and down, depending on how its numbers shape up.
On that not, let us shed some light on few points that must be considered while investing during an earnings season:
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Keep an eye on analysts’ reports
Analysts come up with analysis and estimates of different firms around an earnings season. The evaluation is based on the forecasting models and other fundamentals. Investors can make use of these forecasts to determine how a company will perform post its earnings release.
However, investors should also know that these estimates differ from brokerage to brokerage. Still, it is worth keeping an eye on how the company’s earnings fare compared to quarterly estimates.
Market expectations
The performance of a company is generally judged by its ability to beat market expectations. The stock of a company, which manages to smash market expectations, jumps. Similarly, a company which fails to live up to estimates, usually tumbles. It is believed that a company that has a track record of continuously beating market expectations is probably doing something better than the rest in the pack. Similarly, a company with earnings below market expectations likely has some problems.
Relying on a single quarter earnings is not enough
There are times when a company’s stock price may see volatility because of quarterly earnings. However, it is short-term phenomenon and investors should not worry about it. Investors should be confident of the stock in the long term if its fundamentals are intact. Experts advise against judging a company’s performance based on a single quarter and instead focus on its average sales and earnings per share (EPS) growth over the quarters.
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Look beyond consensus
A company missing the market estimates can be seen more as a function of the estimate compared to its performance in the given quarter. Thus, selling the stock right away if a company misses expectations makes little sense. It is more prudent to track closely why it missed the target. Wise investors always look beyond analysts’ consensus numbers.
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The Bottom Line
Depending on a company’s earnings report, its stock may move either up or down. Investors with a long-term investment approach should only take long positions post earnings results. However, one quarter is not enough to either stay long or exit a long position. It is more important to analyse earnings report in greater detail. The conclusion should only be made after proper analysis.
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