What To Look At During Earnings Season

Every quarter publicly traded companies report earnings and many give guidance going forward. There are many details that investors look at during earnings season and the most important one, for me, isn’t found in the earnings report. It is how the stock reacts to the news. That said, here are a few things I look at during earnings season.

How The Stock Reacts To The News:

The reason why I focus on how the stock reacts to the news is because that tells me what the large investors are actually doing after the earnings are released. What good is it for me if the company reported an amazing quarter but the stock gapped down and fell 10-20% after earnings were announced?

Another important thing to keep in mind is that most stocks trend. Meaning, if the stock gaps up after reporting strong earnings and continues to rally for the next few months, there is a high likelihood that it will gap up again – or at least – continue to rally in future quarters. The converse is also true.

Expectations:

Another important item is how the actual numbers fared with respect to expectations. Analysts work hard to create expectations for corporate America. Does a company beat and raise guidance or does it miss and lower guidance? What the actual numbers are compared to expectations are another piece of the earnings puzzle that I like to factor into the equation.

Year-Over-Year Numbers:

I also like to look at how the company did on a year-over-year basis. Meaning, what did the company earn in Q2 2023 compared to Q2 2022. This way I am comparing apples to apples. The same is true for revenue and other key metrics. The reason why I do that is because comparing Q4, which tends to be a seasonally strong period for retailers, is not the same as Q1, which tends to be quiet. Comparing the same quarter year over year gives me a good grasp about how a company is performing in the same period each year.

Guidance:

The next important thing I look for is guidance. What does the company say about its future? If the company is bearish on its future, why should investors be bullish? On the other hand, if a company is too bullish, it might have a hard time living up to those high expectations going forward. Ideally, I want to see a company have several beat and raise quarters.

Bottom Line:

Everyone is free to dive into earnings and “use” the data anyway they want. I want to share these points with you to help give structure and outlining my thinking in case it helps you approach earnings with a different point of view.