Professional Investors’ Post-Earnings Checklist, Explained

Professional Investors’ Post-Earnings Checklist, Explained
Carl Hazeley

almost 3 years ago3 mins

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What’s going on here?

Investing during earnings season can be tough: with so many company updates coming in, share prices often shift before you’ve had time to get your head around what’s happened. But there are three things professional investors do after every earnings report that you can replicate in order to make smarter – and not just faster – investing decisions.

1️⃣ Assess whether the company did better or worse than expected – and why

Compare the firm’s financial performance to your own forecasts if you’ve got them. Failing that, you can find analysts’ average estimates on platforms like Bloomberg or Atom Finance – or often in media reports, including Finimize (whoever they are).

But what’s really crucial is to understand why the company did better or worse than expected, and whether that’s a short-term factor or something longer-lasting.

Netflix reports how many subscribers it’s adding versus its own forecasts
Netflix reports how many subscribers it’s adding versus its own forecasts

2️⃣ Research what’s next for the company

A firm’s own guidance as to how much it’ll earn going forward is usually the best starting point – but remember that companies like to underpromise and overdeliver. Looking at close competitors’ past and predicted performance can be helpful: if Adidas and Under Armour are growing sales quickly, then Nike probably will be too.

And be sure to check out any reputable new industry-wide predictions, with a particular focus on incremental data points. Up-to-date sectoral information could have a big influence on investors’ opinions – but it’s safe to assume that analysis from a year back will already be reflected in stock prices.

Netflix again – this time illustrating its subscriber growth forecast
Netflix again – this time illustrating its subscriber growth forecast

3️⃣ Update your forecasts and valuation

Steps one and two should help you figure out whether your investment thesis is playing out as planned. If you’ve already developed detailed forecasts and a valuation framework (see Related Content below for more on this), refresh them to reflect your opinion of the company’s post-earnings prospects.

When it comes to valuation, of course, both the company’s share price and the wider market will have moved over the previous quarter. So ask yourself: would I buy this stock today, knowing everything I know about the company now? If your answer’s yes, great: you’re either already an owner or set to become one. If not, it might be time to think about selling up and/or looking for more attractive opportunities elsewhere.

Why should I care?

Professional institutional traders can buy and sell stocks in the windows before markets open and after they close each day, which gives them a huge advantage over retail investors when it comes to reacting to company earnings updates.

Some reporting-related trading strategies focus on trying to find ways to keep up with these rivals – but while you might get lucky from time to time, the odds are stacked against you in the long run: you’ll almost always lose more than you make.

The approach outlined above, however, is exactly the same as that used by professional long-term investors. Stepping back and letting share prices settle down after an initial flurry of post-earnings trading activity allows you to make much more informed investment decisions as a result – and that can only be good news for your portfolio.

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Disclaimer: These articles are provided for information purposes only. Occasionally, an opinion about whether to buy or sell a specific investment may be provided. The content is not intended to be a personal recommendation to buy or sell any financial instrument or product, or to adopt any investment strategy as it is not provided based on an assessment of your investing knowledge and experience, your financial situation or your investment objectives. The value of your investments, and the income derived from them, may go down as well as up. You may not get back all the money that you invest. The investments referred to in this article may not be suitable for all investors, and if in doubt, an investor should seek advice from a qualified investment advisor.

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