Tuesday, January 20, 2015

Why Is Earning Season important?

Hello dear investors,

If you are in the U.S; hope you enjoyed a relaxing Martin Luther King holiday. If you were working, as I was, hope your day went smoothly. My favorite quote from the king himself:

So, what is earning season all about? I received the question for this post via email from one of my readers and felt it would be perfect to write a post about it. 

This post is part of the Investing 101 series and is targeted to new investors or people thinking of investing but the content can be useful to everyone, seasoned and new investors alike.

First earning season for this year, 2015, started last Monday January 12, after the closing bell, with Alcoa being the first company to report earnings. 

Publicly traded companies (those that trade in the stock market) have a duty to report earnings on a quarterly basis (four times per year) for various reasons but mainly to disclose all relevant financial information which can help investors assess how a company is doing and how it has progressed (or not) since the prior earnings report. Earnings season is the official name for the period of time in which the vast majority of U.S publicly traded companies release their earnings reports; hence the name.

One single earnings report is not enough. Many investors utilize and compare the information from various quarters in order to make investing decisions. Factors to look in the earning report include but are not limited to:

  • Earnings per share growth
  • Profits
  • Plans for present and future growth and development 
  • Sales increases (or decrease)
  • Net income increases
  • Results and/or progress of company initiatives put in to place
  • Signs of any new risks and/or competition the company may be facing
  • Return on investments from various projects and/or marketing campaigns

Consistency in revenue growth and profits is what we all look for. Improvements in this area quarter over quarter can help us determine whether the company is on the right track. However, a company that is constantly reporting losses for several quarters in a row can serve as a red flag and a warning to investors.

Earning season is important (and awesome) because it prevents insider trading from happening. Some of you may not be aware that financial information was not always accessible to individual investors like you and me. There was in fact a time in U.S history when companies had the option to keep their information private or would only share information with a selected group of high net worth individuals, leaving a lot of people blindsided. Thankfully, that came to an end shortly after the crash of 1929.

Although said crash was one of the most devastating financial downfalls in U.S history; it was also the reason why, today, we can all enjoy the privilege of having access to the financial information of every single company that chooses to participate in the stock market. Thanks to the Securities Act of 1933; insider trading* is illegal and every single investor-- from the average individual on "main street" to the richest person on earth has to have access to the same exact information from companies when it comes to investing. 

*Insider tradingthe illegal practice of trading on the stock exchange for one's own advantage through having access to confidential information. 

As clearly outlined in the SEC's (Security Exchange Commission) website:

Securities Act of 1933

Often referred to as the "truth in securities" law, the Securities Act of 1933 has two basic objectives:
  • require that investors receive financial and other significant information concerning securities being offered for public sale; and
  • prohibit deceit, misrepresentations, and other fraud in the sale of securities.

I have mentioned several times on the blog how much I enjoy earning season as it is an opportunity for me to follow the companies where I am a shareholder and see how they are doing. It also allows me to evaluate other companies for prospective future investments. Below is a list of the companies in my portfolio and the date they report earnings. 

Company Earnings
Johnson & Johnson 1/20/2015
Starbucks 1/22/2015
Coach 1/29/2015
3M 1/27/2015
Apple 1/27/2015
Procter & Gamble 1/27/2015
Colgate 1/29/2015
Google 1/29/2015
Visa 1/29/2015
Mastercard 1/30/2015
Disney 2/3/2015
Coca Cola 2/10/2015
New York & Co. 3/23/2015*
Nike 3/23/2015*

*Date is estimated, not yet confirmed

As it is the norm here on the blog, I'll be sharing some of the results from the companies in my portfolio as earning season unfolds.

One quick tip: Most earning reports transcripts are super long and may be too time consuming to read. If you'd like to get a nice summary of the report for any company you may be interested in, I recommend you search for the earnings press release which is usually a significantly shorter version that summarizes the most important parts of the full earning report. I read the earnings releases when i am short on time. More on how to find it and what to look for on the next post.

thank you for reading!

Cheers to profits,