Every earnings season, Wall Street plays the expectations game. Companies whose results beat analysts’ consensus estimates are rewarded with a pop in their stock price; names that disappoint drift lower or sell off, depending on the magnitude of the shortfall.
The expectations game gives the infotainment industry that covers the stock market an easy story to tell.
For successful investors, these articles have little value—even worse, they can be dangerous to your wealth. Headlines about whether a company met Wall Street’s consensus estimate distract investors from delving into the underlying factors that drove the company’s quarterly results and will shape its future business prospects.
Serious investors view earnings season as a quarterly check-up on the health of the businesses that underlie the stocks in their portfolios.
Income seekers should focus on whether the company can sustain and increase its dividend—the keys to building wealth for shareholders.
Does the underlying business continue to strengthen and consistently live up to management’s guidance?
Companies that can answer these questions in the affirmative have a place in our Lifelong Income Portfolio, especially if their stocks trade at reasonable valuations. However, names that face major headwinds should be sold—even if it means turning your back on a big yield or taking a loss.
Quarterly results shouldn’t be viewed in a vacuum. The best analysis situates the numbers and management’s comments within the context of the company’s peers and results from previous reporting periods.
Reading 10-Q filings and transcripts from quarterly earnings calls often provides early insight into industry trends that will drive or impede future returns. This exhaustive—and frequently exhausting—focus on individual companies often serves as an early warning system for emerging risks or opportunities.