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Earnings #2

     Is 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.

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