If you’ve been feeling like you’re on an investing roller coaster lately, you’re not alone. The market has seen some significant shifts as big name companies like Facebook and Amazon have unveiled their quarterly earnings. In fact, the rise in Amazon stock immediately following the company’s earnings report on July 26 was enough to briefly give CEO Jeff Bezos the coveted title of richest person in the world. He edged out Bill Gates by less than $1 billion in net worth.
To the uninformed, these market changes might come as a surprise. However, it’s not too complicated to take advantage of the shifts and make some smart investments. Making money on stocks in the next year might have more to do with managing this earnings game than anything else. Here’s a guide to understanding quarterly earnings and how to use that information to start seeing green.
What Are Quarterly Earnings?
Since 1934, the Securities and Exchange Commission (SEC) has been protecting shareholders. Among its requirements for companies with shares traded on U.S. exchanges is that they file quarterly financial statements at the end of every fiscal quarter. When these documents are ready to be filed with the SEC, the managers of these companies typically issue a press release with summary financial information and host a conference call for shareholders to review the data and to provide color on what’s happening at the firm currently and prospectively. Wall Street analysts listen to these presentations, ask management questions afterward, noodle on it, and revise their financial forecasts and recommendation rating for the company. Any significant changes in these figures can lead to huge swings up or down in stocks.
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How the Game Has Changed
Quarterly earnings reports have been scrutinized by the pros for years. However, for too long only Wall Street analysts and institutional shareholders were invited to participate in the conference calls. Two things changed that and more leveled the playing field for individual investors.
First, the internet democratized the distribution of financial data. All the facts and figures now are available almost instantaneously and for free. Second, to clean up Wall Street’s mess after the internet bubble burst in 2000, the SEC instituted Regulation FD, or Full Disclosure. Now you’re armed with the same information at the same time as the pros, or at least we’re working our way there.
How to Keep Score
You can find all the information you need to track a company’s market value for free on Yahoo! Finance or countless other sites that aggregate data. Enter your stock’s ticker symbol (e.g. AAPL) in Yahoo! Finance and you’ll find consensus estimates for revenues and earnings per share (EPS) for the next two quarters and fiscal years.
These figures are revised as the Wall Street analysts who publish their research on the firms make changes. If a company’s sales are better than those forecasts predicted when it announces its quarterly financial results, the stock could rise … a lot. Of course, the shares could also be clobbered if they underperform the analysts’ predictions. This is critical: It’s not about how well your company does, it’s all about how well it does relative to Wall Street forecasts.
Follow the Conference Call, Then Get A Second Opinion
Here’s a savvy investment strategy for deciding whether to buy short-term stock triggered by a quarterly sales or earnings disappointment: Follow the quarterly conference call. That will help you get a sense of whether the company’s problem is transitory or permanent. If it’s a transitory issue, this might be a great time to buy more shares. If it’s a permanent problem, you probably should sell your stock at any price because the value of a busted company ultimately could be $0.
After the company has released its quarterly results and its stock soars or is bludgeoned, you might turn to a few Wall Street analyst reports reviewing the results, which will set the stage for the stock’s next move. Since these analysts create the consensus forecasts that move the company’s stock price, it’s important to know their numbers and how they arrived at them. Some analysts will appear the day of or after the quarterly announcement on TV to talk about it.
If you can commit to spending an hour per quarter following this earnings process, you’ll be a much more knowledgeable, independent and effective investor.
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