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Are You Ready For Earnings Season?

Written by

Adam Szekeres

Published on

July 21, 2020

If you’ve ever read news from a trusted financial source, you’ve probably caught sight of financial earnings reports. These are often published one or two weeks after the quarter closes. Why is this such a big deal? As investors trade stocks on the stock exchange, we have to remember that we are not just buying a piece of paper or a digital contract. We are in fact buying ownership in a company (let’s skip CFDs as those are a different story). These earnings reports tell us how a business is doing both financially and strategically. They are required by law, specifically by the SEC. In fact, these reporting periods are very active which often brings volatility to the markets. It is not unheard of that a company gains ~20% after a strong quarterly performance. But of course this goes both ways where companies can lose investor interest if they perform below expectations. So how do we tap into this?

Starting with the basics

When we talk about a financial year, a company has to report FOUR quarterly reports and ONE annual report at the end of each financial year. The dates for these reports vary, but in general the earnings season start one or two weeks after the end of each quarter (March, June, September, December). It’s important to note that not all companies report during this period as some companies have a different financial year and their quarters don’t coincide with these dates. Therefore, these specific companies report in between the official earnings seasons. What’s also interesting is that each earnings season unofficially begins with Alcoa’s, an aluminum producer’s report. There is no official ending to the earnings season, but it is done when most of the companies have released their earnings reports which takes about six weeks.

Usually, corporations release an earnings report in a presentation format, but it can come in the form of a document. They also have to amend a From 10-Q, which is required by the SEC. As we all know, companies always try to highlight their strengths to show investors that they are doing well beyond expectations and that they are the superstars of their sector. However, the 10-Q form doesn't necessarily give room for silver linings, which makes them a more reputable source when it comes to a company’s true performance.

Form 10-Q

The form has two parts. The first part contains relevant financial information covering the period. This includes condensed financial statements, management discussion and analysis on the financial condition of the entity, disclosures regarding market risk, and internal controls. The second part contains all other relevant information. This includes legal proceedings, unregistered sales of equity securities, the use of proceeds from the sale of unregistered sales of equity, and defaults on senior securities. The company discloses any other information in this section as well. It can be a very lengthy document as it can reach well beyond 100 pages. This depends on the size of the company and the complexity of the business model.

Most retail investors probably don’t read these filings as they are long and complex, but if you want to become a really good investor, it might be a wise decision to read the most important parts of it and to familiarize yourself with the structure. As a great example, check out Morgan Stanley’s Q-10 filing from Q1 of 2020.

Morgan Stanley Q1 2020 Q-10 filing

What to look for

When you open the quarterly financial reports of a company, it is full of financial jargon and things that a retail investor, or someone just starting out with investing, might not understand. Most people think that finance is super complex. On one side it is, but most calculations that research analysts use are on a pre-calculus level. I suggest you look at the following sections on the report:

  1. Three financial statements where you will find basic information on the financial health of the company and how the revenue turned out. Also very important when looking at these numbers is to compare it to previous quarters as well as to the peers as individual numbers don’t mean much alone.
  2. The discussions and notes from management as you will be able to learn about the strategies employed and where the company is headed.
  3. Risks that the corporation faces or might face are also listed in the filing which is important for future performance. A risk such as the Corona virus epidemic derailed most companies from their planned path and this dropped stock prices. Usually, risk factors such as COVID-19 are once in a decade type of deal, but it is always a good to look for these risks.

Financial statements carry very important information which you should analyse carefully. If you would like to learn more about financial statements and their key aspects, read my other post about equity research. Additionally, there are some key ratios that you should look for for each specific industry. That includes looking at the banking industry and banking stocks where you‘ll find net interest margin, loan-to-asset ratios,  as well as the return on assets or ROA.

Now to the juicy stuff

Now you know what an earnings season is and what Q-10 forms are, let’s show a few examples highlighting why this period is particularly interesting to traders.

The first reason is volatility. This sounds scary, but volatility also means that if a stock can go down, it can just as easily go up. Equity research analysts have consensus estimates for earnings and revenues which really just means that they try to predict how well or how badly a company performed during the specific quarter. If a company outperforms these consensus estimates then the stock is expected to go up, especially if forward-looking statements from the management are optimistic.

For example, Tesla is a great example. In 2018, during the Q2 earnings season, the company gained 16% after the results were publicized. The reason for the jump in price was that Elon Musk promised profitability, which of course investors loved.

Ticker: TSLA, Tradingview

I personally enjoy getting in on the action as well. One of my favorites used to be Boeing because it was a financially stable and growth-oriented company. I would get in a day or two before the quarterly report and I would hold it for a few days after the report. I would cash out with about a 15% return just after a few days. As we live in interesting times now because of the COVID-19 pandemic, this obviously got a bit harder. We have to look for new winners. If we take a look at the market, we see that stay-at-home stocks such as Zoom, Slack, or any of the payment company have been doing well. This could mean, but of course it is not a certainty, that these companies will report a very good Q2 report, which could bump stocks higher. We’ll just have to see!

Where we go from here

I like to think of myself as a value investor. Although I like to get my hands dirty with financial analysis, investing for quick returns during the earnings season is just pure fun. You might be saying “you’re just gambling!”, but if you look at past quarters, read the news, look for signs of where stocks and companies are going, you’ll absolutely minimize your downside. I don’t gamble, because I believe that it is a waste of time and money, so just do your research and make educated choices when it comes to investing during an earnings season.

I hope you enjoyed this article! Stay tuned for some other great articles on similar topics. If you have not yet read my previous articles, please do so as you might learn a thing or two. If you do not agree with some of the things I talk about, leave a comment and we can chat!