There’s baseball season, football season, the holiday season and, of course, earnings season. While the first three may fill you with happiness and (in the holiday case) good cheer, earnings season fills new investors with confusion.
Why do I bring this up?
I woke yesterday morning to a nerve-wracking CNBC.com headline: Investors Brace for Shaky U.S. Earnings Season.
What is Earnings Season? Is It Contagious?
The good news: earnings season affects you directly, but not in the harmful way you may think.
Earnings season is the time (quarterly) when the majority of companies that move financial markets with their results declare how well they’ve performed recently. This news is for the prior quarter.
It’s important, when listening to reports about earnings, to listen for any future forecasting and to also determine what might have been the culprit behind a great or lousy prior quarter. If it’s increased sales on the same-old widget the company’s always sold, fantastic! If the company had a one-time mistake, things might still be looking up. If products just aren’t selling or management is quitting, it might spell bad news.
What Do I Need to Know?
Corporate earnings reports drive the stock market. Sure, financial markets respond to other pressures, but over time the stock market is simply a reflection of the economy. So, if you reread the headline above, Investors Brace for Shaky U.S. Earnings Season, what does that really mean?
Based on the information I told you above, it means this: companies didn’t have stellar profits last quarter.
That’s not nearly as shocking a headline, is it? In fact, I’ll bet you already knew that.
Move On, Nothing to See Here…..
Many investors read the CNBC headline above and think: I’ve gotta sell right now! If you’ve read my ramblings before, you’ll know that I think the opposite. I’m looking to buy when prices are low and sell when they’re high.
Here’s what I recommend instead of having a panic attack:
1) Rebalance your portfolio. Here’s how it works: if you’ve determined how much stock and bond exposure you want (among other asset classes), skim off the areas that have done well to fill in non-performing areas. Low markets are ideal times to rebalance because you’ll reaffirm your long term strategy, take gains from performing spots and redeploy in assets you already own that are low today. Smart move. Then, schedule another rebalance six months from now on your calendar.
2) Look for buying opportunities. If you’re interested in investing, shaky markets are a great place to place your first buys. Make your list of stocks to watch. Wait for earnings reports. Read what companies report, and make your move! Don’t make a common mistake and go whole-hog on a “can’t lose” investment. I’ve been involved with too many “can’t lose” things. I also told my dad I couldn’t lose my hair like he did. Glad I didn’t bet on that….
Not excited to make your own stock picks? Read our pieces on how to evaluate mutual funds and how Exchange-Traded Funds work.
3) If you’re nervous, put defensive measures in place. Use stop losses on individual stocks and exchange traded funds. Monitor fund results more frequently and establish a “worst case scenario” strategy. Remember this: never buy or sell everything on one day or at one time. It’s safer to march in slowly and march out slowly. An orderly walk toward the exit beats a panicked race to the door. Often, down markets rebound quickly.
CNBC, like other publications, is in the business of selling advertising. If the elevator is labeled “Up” or “Down” it’ll be a smooth and steady ride, but I’m sure CNBC knows that “Soar” and “Plummet” garner readers…and then advertiser dollars.
I hadn’t seen that report but that tells me that we’ll be in for a little drop in the market! It’s quite crazy how a company’s stock price will fall even if they had decent profit in a quarter but failed to meet the projections from the Wall Street people.
Great tips on rebalancing and what people SHOULD be focusing on when the reports start coming out.
Doesn’t it make you sick? Sometimes I think that’s wrong: a company has a good quarter but does meet expectations, so the stock dumps. That’s why I keep expectations for myself very, very low ;-).
I’ve read somewhere there is a trend for companies to stop issuing such reports…or am I wrong and SEC requires them to show and tell?
It’s a requirement in the US to report quarterly if you’re a public listed company. I’m not sure if it’s SEC or the exchange that requires it. There is a trend for companies to offer less guidance so that analysts hopefully will stop creating unrealistic expectations.
I think you are referring to quarterly guidance Brent and you are right there are more corporations no longer giving quarterly guidance. HP and DELL just announced they will no longer give guidance. Guidance is just a distraction for corporate executives who better serve shareholders by focusing on the long-term performance of the company! Guidance primarily benefits Wall Street traders because they are more interested in short-term volatility to generate trading profits.
Nice post. I agree that you can buy great companies right after the earnings, if investors overreact to a slower quarter. Remember what happened to Apple after great earnings last quarter? It was time to buy in the $560 range.
I agree completely to buy on bad news. Like you said though it’s important as a new investor not to put all your eggs in one risky basket. A lot of people may have invested in Lehman Brothers thinking they were a certain buy!
This is all “adult” stuff of which I have no knowledge. but I am glad that I can peek over your shoulder. I feel like every report is fudged, much like when I fudge my productivity reports to my boss 🙂
Everyone has someone they need to fool.
How very interesting. Does this mean that that we should look particualrly carefully during earnings season?
The most confusing thing to me starting out was understanding what I was reading and digging deeper than the headlines. The usual headline I would read would be: XYZ Company Beats Estimates! I would read this and think how great that is – without realizing that they estimated complete destruction (and barely beat it).