Tips for Making Money During the Quarterly Earnings Season

It may not actually be a surprise that one of the biggest drivers of growth in the market today is whether or not companies hit their numbers. Seems like common sense, right? Analysts provide the market with a clear set of expectations for a company ahead of its earnings, and if the company doesn’t meet those expectations, then the stock can suffer. Knowing the analyst consensus ahead of time and understanding whether or not the company is likely to hit that estimate can help you pick some real winners with good swing trading strategy during the quarterly earnings report season.

Watch Analyst Estimates

Understanding how a company consistently stacks up against an analyst’s estimates can help you better predict future performance for the company. Companies that consistently hit their earnings estimates will see a jump in share price, while a company falling short can take a beating. A company beating the estimates set forth by Wall Street means the company is doing things right from a management perspective. Companies that present predictable earnings cycles are considered a golden investment opportunity for those who plan to trade the quarterly earnings season. Companies that are showing a consistent pattern of falling short of their estimates likely have managerial problems. These stocks are good for shorting during the quarterly earnings season, but you should be careful with these calls.

Estimates Aren’t Everything

Keep in mind that the analysts’ estimates aren’t the be-all, end-all deciding factor for a company. A company that doesn’t consistently hit its growth estimates doesn’t mean it is a total failure and not worth investment. Companies that exceed growth expectations could run into a problem of growing too fast, too quickly which ultimately collapses the business. Earnings are hard to predict and can be a good barometer for the success of a company in the eyes of other investors, but you shouldn’t put more stock in it than its worth. Companies know how crucial it is to meet these estimates, so they will do everything they can to manage their numbers to meet these estimates. Executives have several tricks under the table that can be used to boost an earnings report at the expense of future reports, so investors must learn to spot these tricks. Finding real performance trends from reports means looking at how quarterly numbers stack up against the estimates provided by Wall Street.

Read Between the Lines

You should understand how to play both the ups and downs of these quarterly earnings reports. A drop in the stock price where numbers come up short can present a prime buying opportunity for the savvy investor. Likewise, a company that is performing well may be reaching its growth wall which means taking profits and looking for other growing companies. Analysts rarely agree with each other on stocks so taking a consensus of them to understand how a company is performing is a good idea. Don’t rely on analyst sentiment to make your trading decisions during the earnings quarter, but you should understand it fully.

Adam Torkildson