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Capital at risk. All investments carry a varying degree of risk and it’s important you understand the nature of the risks involved. The value of your investments can go down as well as up and you may get back less than you put in. Investments in a currency other than sterling are exposed to currency exchange risk. Currency exchange rates are constantly changing which may affect the value of the investment in sterling terms. You could lose money in sterling even if the stock price rises in the currency of origin. Stocks listed on overseas exchanges may be subject to additional dealing and exchange rate charges, and may have other tax implications, and may not provide the same, or any, regulatory protection as in the UK.
Most stocks and shares investors aim for market exposure with an eye to the long-term. They are content to ride out the invariable ups and downs of performance that come from equity investing in the belief that, over time, returns will likely surpass those from other asset classes such as cash and fixed income securities.
In contrast, those who choose to trade and speculate on the stock market thrive on the here-and-now of investing, especially during periods of high volatility.
Few events in the trading calendar come replete with more volatility than the earning reports season.
Here’s a look at what earnings season is and when it takes place, along with pointers for traders looking to use earnings reports as part of their money-making strategy.
What is an earnings season?
Almost anyone can invest in publicly-listed companies, from professional fund managers responsible for billions of pounds to DIY investors who manage their own affairs via online trading platforms and investment apps.
This spread of equity ownership is one of the reasons why financial regulators require publicly traded companies to disclose regular reports about their financial health.
An earnings season is a period during which publicly-listed companies release these reports.
What is an earnings report?
Earnings reports include corporate information covering revenue, net income (or profit), operating expenses, earnings per share, and so on. These reports thus provide at-a-glance insights about the health and outlook for a company.
They tend to be divided into three sections:
- balance sheet – this reflects a company’s assets, liabilities and shareholder equity
- income statement – indicates a company’s revenues, expenses and profitability
- cashflow statement – sums up the amount of cash flowing into and out of a company.
Share prices tend to rise (and fall) more quickly than usual in the run-up to the publication of earnings reports and also immediately after the contents of an update are released.
Reports therefore help traders to determine whether it’s worth taking, or adding to, a position regarding a business, or alternatively avoiding or ditching the stock entirely.
As such, traders in search of volatility seek out earnings reports in the same way as bees go in search of nectar.
When is earnings season?
Earnings reports are usually issued each quarter and are a mandatory requirement in the US, although not in the UK. For the latter, companies are required as a minimum obligation to report annually. That said, given the increasingly global nature of many industrial sectors, a large majority of UK companies participate in quarterly earnings updates.
Earnings season usually begins a couple of weeks after the final month of a particular financial quarter and then runs for about six weeks. Here’s a rule-of-thumb timeline:
- First quarter earnings season: quarter ends 31 March; earnings season starts mid-April, ends in May
- Second quarter earnings season: quarter ends 30 June; earnings season starts mid-July, ends in August
- Third quarter earnings season: quarter ends 30 September; earnings season starts mid-October, ends in November
- Fourth quarter earnings season: quarter ends 31 Dec; earnings season begins in mid-January, ends in February.
Not all companies’ financial quarters fall on the same dates and not all publicly listed businesses publish their reports during earnings season. It’s not uncommon, therefore, for some companies to report outside these periods.
That said, most large companies’ announcements tend to fall within the timeframe outlined above, with companies in the same industrial sector often reporting in close proximity to each other (often due to seasonal effects that they all experience). Dates won’t tally exactly because companies often have different fiscal years, which means their reports can appear at different times.
For example, one company might release its third-quarter results at the end of September, while another business might release its annual report at the end of September.
When do earnings reports appear?
Earnings announcements tend to be released outside market trading hours (at a stock exchange where a particular stock is traded) so the information contained in the announcement can reach as many people as possible and doesn’t interrupt the trading day.
The down time between an announcement and an exchange opening therefore provides traders with time to run through the details behind a specific announcement before deciding whether or how to respond.
Nowadays, it’s relatively straightforward to keep abreast of earnings announcements by referring to online earnings calendars provided either by a particular stock exchange or investing platform. Many calendars include an online tracker/alert feature which can be set to remind the user when an update from a specific company is due.
Another way to keep tabs on upcoming announcements is to check the investor relations sections of company websites. In addition to flagging up particular dates and making the relevant documentation available at the due time, companies offer would-be ‘attendees’ the chance to tune-in online to earnings calls and/or other relevant investor presentations.
An earnings call is a conference held by a company featuring key executives, shareholders, the media and analysts. In the call, management will talk about the report and answer questions in relation to the company’s performance over the previous quarter along with its prospects.
How to use earnings reports in trading strategies
One of the first things for investors to weigh up before deciding to trade on earnings reports is whether they have the appetite to get involved immediately.
Some will prefer to stay away from the potential ups and downs of earnings season and wait for share prices to settle, having had the chance to work through the numbers, plus any guidance that emerged from earnings transcripts, calls, presentations and media analysis.
For those of a patient disposition, the first phase of an earnings report trading strategy might therefore simply involve watching the patterns unfold from several reporting periods for a company before ever deciding to buy or sell its stock.
This is because the insights offered from an earnings report can seriously affect sentiment towards a company and therefore contribute significantly to movement in its share price.
It’s also worth bearing in mind the potential ripple effect that one company’s results might have on rival businesses in the same sector, especially if the update is particularly upbeat or dire.
Be selective
It’s nigh-on impossible for an individual trader to cover every company that is taking part in earnings season, so it’s worth refining a list and then just focusing on key players. These could include businesses where you already have exposure, or companies that you’ve been watching and have on the radar as potential additions to a portfolio.
Having narrowed down a list, establish when a company is due to make an earnings announcement by referring to its earnings calendar and noting the exchange on which it trades.
Do your research
Next, take a look at estimated earnings figures which will likely have been trailed by analysts and in the press in the run-up to the announcement.
Bear in mind that market reaction on the day of an announcement does not necessarily home in on the actual numbers contained in the update. Just as important are how near the official figures being disclosed are to analysts’ expectations.
If the numbers end up beating expectations, that could be a sign the share price will rise, with the reverse also being true. Where key metrics (such as profits, customer/subscription numbers, earnings per share, updates about new subsidiaries, acquisitions, etc) rise, but fall short of expectations, this can be damaging to a business’s share price, at least in the short term.
To really get a handle on a company’s financial position – and therefore the potential direction of its share price – it’s worth taking time to work through a company’s historical data in areas such as predicted and actual earnings.
By trawling through previous quarterly earnings figures, it’s possible to get an idea of how the market has typically responded in the past and potentially what to expect next.
Where a share price in the past has moved significantly on the publication of an earnings report, this suggests market sentiment tends to be influenced by the announcement. But where there is less price movement, it may be that other factors over and above the announcement have more sway.
Draw up a plan – then stick to it
It’s sensible to work out a strategy before piling into the first trade that comes to mind on the back of an earnings announcement.
This could include creating a set of rules for entering or exiting a trade, establishing a set of profits goals, questioning how much time you’re going to set aside to spend trading, and working out a risk management strategy.
This last item would include setting stop losses and limit orders so that a list of trading parameters underpin any instant decisions. Sticking to these removes any emotional elements that creep into a trading approach and also allows investors to remain logical about what they are trying to achieve.
Learn as you trade
Once each earnings season comes to a close, it’s also worth investors reviewing the results of any associated trades they have made and analysing both what worked for them and what didn’t in terms of financial outcomes.
Trading strategies take time to come to fruition, and learning from each season can help pave the way for a successful investing journey ahead. Watching and understanding how companies typically behave during earnings season can ultimately work to the benefit of the informed investor.
