Earnings season is upon us yet again. Throughout earnings season, publicly traded companies will let investors in on the financial results for the most recent quarter. Often times, earnings reports lead to big opportunities in the market. Before you can take advantage of these opportunities, you’ll need to know how to spot them and what to look for.
What Is A Quarterly Earnings Report?
Quarterly earnings reports are filings that publicly traded companies must file with the US Securities and Exchange Commission (SEC). These reports are designed to give investors a financial view of the company. They provide information with regard to revenue, net income, earnings per share, and more.
Why Do Earnings Reports Lead To Opportunities In The Stock Market?
Most of the time, when making an investment, we are doing so on outdated financial information. Even when earnings reports are filed, by the time we see them, the data is weeks or even months old. Nonetheless, the day an earnings report is released, investors have the most up-to-date information surrounding the company. When comparing the report to expectations, investors are either pleased with the report or upset by it. As a result, we tend to see reactions in the market. Reactions that can be turned into profit if done properly.
A Good Strategy For Using Earnings Reports To Your Advantage
It took me some time to find a strategy that worked for me when it comes to taking advantage of earnings reports. Nonetheless, I found it. Here’s the step by step process to using an earnings report to your advantage in the market:
Step #1: Finding Coming Earnings Reports – In order to properly prepare to take advantage of an earnings report, you have to know when the reports are coming. The good news is that this information is easy to come across. Simply use a free earnings calendar. I’ve found that the earnings calendar that works best for me is the one provided by Yahoo! Finance, but there are plenty of options out there.
Step #2: Do Your Research In Advance – Before deciding to buy a stock based on an earnings report, it’s important to do your research. It’s important to know more about the company than what is happening in the here and now. Before making a decision to buy a stock based on earnings, take a look into:
- Look Into What The Company Does – First, you’ll need to look into what the company has to offer. Is it working in an industry that you believe has growth potential? What about the company’s products and/or services? Do you truly believe that they have the potential to grow? If the answer is no to either of these questions, you may want to avoid the stock regardless of earnings.
- Dig Into The History – Next, you’ll want to look into the history of the company. Has the management team properly executed its plans? How are sales going? Have they been rising through the years? These types of questions are important. Sure, an earnings report could lead to a nice bump in value if it’s positive, but that increase in valuation can be very short term if the underlying company doesn’t have a history of success.
- Look Into The Moat – Legendary investor, Warren Buffet, has been famously quoted several times regarding what he calls a business moat. Buffet only invests in companies that have a large economic moat. Essentially, this is his way of saying that the company is protected with some hefty intellectual property (IP). When a new, innovative product is invented, the inventor must seek to patent the product in order to protect it from the competition. Buffet looks for companies that have strong protection of their products, keeping competitors at bay. When considering any investment, do what buffet does and dig into the moat.
Step #3: Prepare For The Report – Once you’ve found a coming earnings report and done your research to determine whether or not the investment might be a good one, it’s time to prepare. First and foremost, mark your calendar and be prepared early. This means:
- Start around 6 am as pre-market releases can come out early.
- Get your trading panel up as soon as you get to the computer and be ready to buy the stock should things go well. Movement generally happens in a matter of minutes, so tinkering around to get prepared isn’t an option.
- Have your news source up. A little bit of research will tell you which PR provider the company uses most often. Have that press release agency’s news section live on your computer and ready for the release.
Step #4: Don’t Get Jumpy – Now you wait. It’s not usually a good idea to buy in advance as anything can happen on earnings. So, sit back and get comfortable and wait for the report to be released.
Step #5: The 2 Minute Glance – Once the report is released, take a 2 minute glance. This means to quickly comb the report for revenue, earnings per share, and guidance. These three key factors are used to tell investors how well or how poorly the company performed throughout the quarter. However, I can’t stress the speed at which you need to do this enough. With a strong report, a stock could be up 8 to 10 percent in a matter of minutes. So, follow the 2 minute rule.
Step #6: Assess The Market Reaction – Now that you have an idea of how positive or negative the report was, flip back over to your trading chart. By now, there should be a trend emerging, and if all went well, that trend will be an upward one. Nonetheless, wait for the trend to emerge before making your move. Subtle nuances in the report could lead to declines, even if earnings, revenue and guidance were all positive.
Step #7: Time To Strike – If the uptrend does emerge, buy the stock quickly to enjoy the ride up. If you did your research and things went well, chances are that the stock will climb, catipulting you into a solid long-term investment.