Investing in the stock market requires strategy. Timing and information are critical if investors are to make successful investment decisions. Earnings season is one of the most important and anticipated times of the year to invest.
Earnings season refers to when quarterly financial reports are released, indicating how a company has performed for the quarter and how they expect to perform going forward. Investors need to be aware of the performance of the companies they invested in, and make informed decisions based on that knowledge.
With that being said, here’s a guide on how to invest through earnings season.
Don’t Try and Guess When companies report their earnings, the stock price may fluctuate depending on whether these earnings beat or fall short of expectations. Attempting to guess which companies will beat expected earnings could lead to poor investment decisions.
Investors should use earnings season to monitor whether the company has been performing well (i.e. is it a good company to invest in?) One bad quarter does not indicate that a company is a bad investment. In fact, one or two bad quarters for a company that has solid foundations as well as a promising plan for the future could push its stock price down and open up potential investment opportunities.
Earnings season, and particularly future forecasts, should give investors an indicator of what direction the company is heading towards. The earnings report reassures investors whether their investments are good or need to be reconsidered.
Estimates are important, but… Estimates hold huge importance during earnings season.
Investors typically react to a company beating estimates by buying more and pushing the stock price up, and vice versa. Therefore, it is wise for an investor to monitor estimates and keep track of companies that look like they will potentially surpass expectations.
Now although investors should be aware of estimates, they should not be very heavily influenced by them. At the end of the day, they are still estimates, and truth be told, it is very difficult to predict a company’s earnings or future forecasts.
A company that missed estimates may have big plans for future growth. The same goes for the opposite situation, a company that beats estimates may not have a solid growth plan for the coming year(s).
What should investors do? To sum up, earnings season is one of the most volatile periods in the stock market.
Earnings and estimates drive stock prices up and down, opening the door for significant potential gains and losses.
Investors should be aware of the company’s earnings as well as analysts’ estimates for a couple of reasons.
The first reason is that earnings indicate the performance of the company in the rear-view mirror. Meaning that they provide an outlook on the past quarter and can act as an indicator of what to expect in the future.
The second reason is that analysts’ estimates provide some sort of benchmark for investors to assess how a company performed. You should not blindly believe that if a company beat estimates, then it is a great investment. You’ll need to look past the estimates and dig deeper into the reasons why this company performed well or didn’t perform well.
At the end of the day, what drives the market during earnings season is investors’ reactions to earnings and estimates.
Being able to catch trends that a particular industry is performing well or that certain companies are on the decline is a very useful skill for investors. That requires investors to have good market awareness and to follow their investments and companies of interest more closely during earnings season. It’s also a good idea to look at how well an industry performed during the quarter.