a company's earnings report going to be a gold mine or land
mine? That's not an easy conclusion to draw in advance, but
you can skew the odds in your favor. Most important is
information. You need to know as much as possible about
the company, the sector it is in, and the names of other companies
in the same business. You need to know what date they will
release their earnings announcement. Is the earnings report
going to be before, during, or after the regular trading session.
You need to know what their earnings were for the same
periods last year, and what the earnings estimates are for
the current period that will be released. The same information
for similar companies can also be helpful, especially if the
other companies will report their earnings on a date prior
to the release of earnings by the company in which you're
interested. Watch to see how similar company's earnings are
reported relative to the street estimates. Weak earnings
by similar companies may spell a warning for your company.
Wording in the text of other company's earnings reports may
hint of future slowdowns, supply problems, or extreme competition.
Price movements in the share price
prior to the earnings release can also give you a hint of
the direction of a stock. Many investors have been buying
the rumor and selling the news. A price that runs up prior
to the earnings release may not be able to be sustained despite
excellent earnings numbers.
Pitfalls and quicksand may not be
too far away when a company changes its accounting period
so that earnings results are difficult to analyze. A company
that has had a fiscal year ending in December (lets use 1999
for an example) and then changes it to end in February will
report results in December 1999, then they will reports for
a two-month period ending February 2000. Next will be first
quarter 2001 results, which will be reported as of the end
of May 2000 and so forth. The two months of January and February
could be called the 2000 fiscal year but is not comparable
to the 1999 fiscal year. And due to seasonality or other
circumstances the company may not choose to compare the quarter
ending May with the quarter ending in March of the previous
year. All things considered, it is a fairly effective
smokescreen when things aren't going as well as management
would like them to be going.
Revenue and income or losses from
continuing and discontinued operations can also throw a wet
towel on the clarity an investor would like to see in an earnings
report. One-time charges can also cloud the numbers, as can
extraordinary income amounts received from litigation, sale
of assets, or sale of stock in another company.
The investor needs to be careful when reading the text of
an earnings report or the columns of values published by publications
such as the Wall Street Journal. The more lines that contribute
to the bottom line the more likely the results will obscure
the truth or confuse investors you would like to have gain
an interest in the stock.