Earnings Season – In this article, we will look at earnings season and what it actually means. Knowing this would be great for investors who have just got started investing in stocks.
Let’s get started.
In simple terms, when large public companies release their quarterly reports, we call that time as earnings season. Please have a look at this earnings calendar below. We are provided with the name of the company, along with its estimated date of filing their result and also the period ending. For example, Citigroup. For the period ending Q4 2017, Citigroup may release its earnings report on 18th January, 2018.
source: Bloomberg.com
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What is earnings season?
To be precise, the earnings season starts just one to two weeks after the last month of the quarter. For example, the earnings season would be just after one to two weeks after March, i.e. after one to two weeks after the first quarter just ends.
That means earnings season begins when each quarter ends.
That also means that January, April, July, and October are the months of earnings season.
But why we should bother about knowing about earnings season?
Here’s why.
Earnings season allow the investors to look into the figures of the companies they want to invest in. And if the time is right, they invest. And if not, they step back and wait for the right time.
And since most major public traded companies release their earnings reports during earnings seasons, they help the investors a lot.
However, one thing every investor needs to keep in mind – not all publicly traded companies release their reports during earnings seasons.
There’s another important thing about the earnings season.
The big companies release their quarterly report when the market is closed. That means typically the quarterly reports are released before the stock market opens (i.e. around 7:00 a.m.) or after the stock market closes (i.e. around 4:00 p.m.).
Giant companies do this for a specific reason. They want to reach as many investors as they can. If they release their reports during the time when the stock market runs its business, many investors will miss out on the reports.
Plus, if they release the reports during the off time, the investors will get enough time to reflect on the figures and respond accordingly.
Since in the stock market a single piece of information can change the course of a company’s future result, quarterly reports are invaluable to prove that the companies are doing better (at least in figures).
How to make the best use of this season?
As investors, this can be an obvious question.
And here’s how you should approach it.
- Earnings seasons are the best time to make some decent money. But why? Because during earnings seasons, you get a lot of trade-able information that affects the stock market. And since new information affects the most price-swings in the stock market, as investors, you would be able to make decent money by selling and buying the right stocks.
- Which earnings season is most important in a year? You may ask this. And we have a definite answer. It is the third earnings season which is the most important. There isn’t a definite explanation for this. But maybe because the third earnings season shakes things up in the stock market. During this time, the companies are on the verge of year end and the investors would like to make decent money. And the stock market also goes ups and downs most during this time. Plus two significant industries, i.e. consumer discretionary and tech have most demands during this time. So, as investors always keep an eye for the third earnings season.
- The case about straddles: The best way to profit from earnings seasons is to buy straddles. But what are straddles? Straddles comprise of both put and call contracts. This gives a trader both options. If the price goes up, she would be able to avail call options at a huge discount and if the price goes down, she will be able to use put options to make profits.
- Do your own due diligence: In investments, you need to study a lot. If you’re interested to trade stocks and are new in the business, it’s better to start with the financial statements of the company. Find out the financial ratios. Do the computation. And start investing small amounts to see whether your judgments are good enough. Talk to an expert about it before ever going big. Earning season will definitely help; but you need to know the secrets of the trade to take advantage of it.
Important Concepts on Result Season
There are three important concepts regarding earnings season that one must know. Here are they in brief –
- Earnings surprises: As traders or investors, you would expect some companies to do extremely well or create ridiculously appalling results. But when the earnings seasons come and you see the earnings of these companies, you may get a great surprise. The surprise can be good surprise or bad surprise depending on what you expect or in which stocks you would have invested your money into. Good/ bad surprise happens when you expect great or worst result, but it turns out to be the complete opposite of your expectation.
- Bellwethers: During the earnings seasons, some companies or industries as a whole are called bellwethers, meaning they come out as leading companies or industries. For example, in the last century, two companies came as the leading companies in the US stock market. They are General Motors and IBM. But why this is important? Because if any one of these companies get halted or even one of them don’t perform as expected, the whole stock market gets affected.
- Aggregate expectations vs. aggregate reality: This is far too common, but this is one of the most discussed concepts in regards to earnings seasons. Before the earnings seasons come, the financial analysts look at the stock market and the companies and estimate how these companies may perform in the quarter. But they’re not able to hit the nail on the right target. As a result, the investors may lose a lot of money by going as per the estimates of financial analysts than the aggregate reality of the stock market.
Practical step-by-step approach to profit from these results
There are four steps which will help you break into earnings seasons –
- First, choose some big companies that you like and would like to invest in. These names should be popular and should be having huge earnings and profits.
- Second, create the financial models for these companies. If you don’t know how to create the financial models, hire an expert to do so.
- Third, look at the financial models as a buy-side analyst or a sell-side analyst.
- Gather all the information and then pitch for the right stocks.
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