It's that time of year again...
...Earnings Season...
...and for value investors who love nothing more...
...than digging into a company's fundamentals...
...it's like Christmas comes four times a year
Except the presents aren't shiny new toys...
...they're earnings reports...
...and they're released by most publicly traded companies...
...at the end of each fiscal quarter
That may sound boring, I know...
...but the market's and many investors don't think so
For them, it's one of the most exciting times of year
Case in point
Just look at what happened on February 2nd 2022...
...when Meta released their Q4 2021 results
Disappointing figures resulted in the worst...
single day stock loss in history
To the tune of $220 billion
The very next day...
...Amazon released their report...
...impressing traders and sparking the best...
...single day rally ever
Another historic day...
boosting the company's value by a cool $190 billion
So, you get it
Earnings reports can make or break...
...mountains of value on the market
So what's in them?
Why do they hold so much sway...
...over a company's valuation?
And why do traders pay such close attention...
...during earnings season?
That's what we're looking into in this video
Before we get into it...
...a very quick heads up...
...here at Capital.com...
...we make explainer videos about the stock market...
...giving you the analysis and insight you need...
...to make informed trading decisions
After this you might want to watch this other video...
...we made about which months of the year...
...see the best and worst stock performances
So let's get back into it...
...by dissecting one of these earnings reports...
...to see what's inside
I called up Capital.com's market specialist...
...Piero Chingari...
...to help walk me through this
An earnings report is a snapshot...
...of the company's fundamentals
It provides information about companies earnings...
...or losses, revenues, costs, debt and assets
That's why earnings reports can move...
...stock prices so much
For example...
...look at Netflix's 2022 Q3 earnings report...
...which just came out and caused a bit of a stir
The streaming giant managed...
...to reverse its decline in subscribers...
...surprising analysts and spurring a 15% boost...
...in the stock's value overnight
Thank God we're done with shrinking quarters
So that's a big feeling of...
...we're back to the positivity
So you can see why value investors and analysts...
...have such a yearning for earnings
The financial report itself...
...is called a Ten-Q or a Ten-K for Q4
It looks like this...
...there's lots of tables, here's a balance sheet...
...numbers and lots of wordy paragraphs
You can find them on most companies websites
In the earnings report...
...we get a lot of valuable documents
First of all, we got the balance sheet of the company...
...which give us an understanding of the assets...
...and liabilities of the company
We got the income statements...
...which give us information about the profits or losses
We also have the cash flow statement...
...in the earnings report...
...which is giving us information...
...about the liquidity management of the company
Publicly traded companies...
...must file these reports...
...with the Securities and Exchange Commission...
...at the end of each fiscal quarter by law...
...and they have a limited time to do so...
...around six weeks or so
The reports themselves are a bit dense...
...so they're usually accompanied by a press release...
...or a letter to shareholders...
...and a presentation or a conference call...
...that covers the highlights and the bottom line
The supplementary materials prepared by the company...
...typically paint a rosy picture...
...of their financial situation and their prospects
But for the straight dope...
...look at the Ten-Q or the Ten-K for Q4...
...to get just the numbers and the cold hard facts...
...no spin
Now because most companies...
...follow the same fiscal calendar...
...it happens that most earnings reports are published...
...around the same four periods each year...
...known as earnings seasons
January, April, July and October...
...see the highest concentration...
...of companies reporting earnings
Earnings seasons are highly anticipated...
...by value investors like Warren Buffett...
...who have an insatiable yearning for earnings...
...and love nothing more than picking through financials...
...with a fine tooth comb
The earnings season is an important touchpoint...
...about a company's fundamentals
It's the best time in the year...
...to look at whether the management...
...is on the right track...
...whether products are gaining market share...
...whether the company has enough buffers...
...to withstand macroeconomic shocks
But for retail investors...
...it's important to look at whether...
...the business of the company is outperforming...
...what analysts are predicting
Yeah, it all comes back to expectations
Earnings season is when expectations...
...collide with reality...
...and the more different they are...
...the bigger the market impact tends to be
Analysts make predictions about key figures...
...including revenue growth metrics...
...like subscribers or users...
...and perhaps most importantly...
...earnings per share or EPS...
...which is simply a company's profit...
...divided by its outstanding shares
It's a really useful indicator...
...about a company's performance
Analysts make predictions...
...about a company's EPS...
...ahead of time...
...along with other metrics...
...such as revenues and growth metrics...
...by taking into account all kinds of factors
One of the most useful is...
...earnings guidance
Now, what is the earnings guidance?
Basically, the company also releases...
...an expectation about upcoming results...
...for the next quarters
This is an important forward looking indicator...
...for guiding the market
Analysts will come up with a range of EPS predictions...
...and you can take all of them...
...and come up with a median figure...
...a consensus
This is then weighed up against the company's...
...actual EPS when the report comes out
The difference between the projected and actual EPS...
is called the surprise figure...
...a positive or negative percentage...
and it's often reflected in the stock's price after earnings
So the larger teh surprise...
...the wider typically the volatility on the market
But on the other end...
...another important touch point...
...during the earnings season...
...is whether a company releases...
...a forward guidance on earnings
If a company has released earnings guidance...
...they don't actually have to...
...then the market may have already priced in...
...disappointing or positive news ahead of time...
...potentially reducing the shock...
...of a surprising report
Now, let's talk about timing...
...which may have an impact on earnings results
You can look at an earnings calendar...
...like Nasdaq, for example...
...to see when a company is expected to release earnings
Companies in the same sector...
...frequently publishe their results around the same time
And most companies tend to report...
...on a regular schedule
Occasionally, a company will deviate...
...from their regular schedule...
...and publish a report early or announce a delay
This may seem innocuous...
...but timing of releases could be a useful signal
Research shows that early earnings announcements...
...are associated with good news about a company...
...and they tend to receive more media coverage...
...and often lead to more trading volume...
...and possibly a price bump
On the flip side...
...delayed earnings are generally associated...
...with bad news about a company...
...and reduced trading volume
Bear in mind, of course, that...
...these are general trends...
...and are never guaranteed
Okay, so what does all this mean...
...for the average investor?
How can you be proactive...
...when it comes to earnings season?
Many investors keep a close eye...
...on upcoming earnings reports
Analysts projected estimates...
...for their earnings per share...
...combined with the company's fundamentals...
...and past quarterly performance
When it comes to numbers...
...investors often look at past performance
How has the company exceeded expectations...
...in the third quarter...
...or over the past few years?
Or during similar economic circumstances...
...in the past?
Of course, the story today...
...is all about inflation...
...and interest rates...
...and those key macroeconomic variables...
are producing an impact...
...on corporate earnings
Of course, estimates are just that...
...estimates
They'll often miss...
...and a company's past performance is never...
...a guarantee of future results
However, knowing when earnings season is coming around...
...and perhaps even paying attention to those estimates...
...can be a useful strategy...
...for diligent investors to consider
Thank you so much for watching
I hope you like this film
Let me know what earnings reports you're anticipating...
...in the comments below...
...there's a lot of big ones coming out
And if you found this film useful...
...you might enjoy the other films...
...on our YouTube channel...
like this film about stock price trends...
...throughout the year
That's it for now...
...I'll see you next time