Stay Calm During Earnings Season--Ignore the Noise

Earnings season has begun. Alcoa (AA), in keeping with tradition, kicked off earnings season yesterday with a less-than-stellar report.

The most recent fiscal quarter ended on March 31. All companies are putting the final touches on their numbers and will be announcing their results over the next several weeks. For every company that is followed by even one analyst, it will be revealed whether the company had an excellent or disappointing quarter, and whether it beat, made, or missed analyst expectations.

That means there's going to be a lot of news. Earnings season takes several weeks. As we know from SENSIBLE STOCK INVESTING, news moves prices. Investors react to earnings announcements, particularly when there are "surprises." The market tends to get jittery during earnings season, to become more volatile than normal. It has a penchant for extrapolating from the reports of a couple of bellwether companies and forming a sentiment that affects the entire market for a day. Then when a different "key" report comes out a day later, everything might reverse and go charging off in the other direction.

My advice to you is, don't get jittery. Stick to your strategies, your plans, and your sell-stops (if you use them). It is natural to be interested in news about companies you own. But whether a company beats or misses its number by a penny or two this quarter is not usually very important in the long run. What's more important are the fundamentals taken as a whole. Is your company's Story still holding up? Are its growth rates still what you want them to be? Is management still doing a good job? Is the company financially sound? Is it adhering to its normal dividend pattern?

Lots of the news created during earnings season is noise, and you should ignore it. For example, a company may beat (or miss) consensus expectations of earnings by a penny per share. Usually, from any long-term view of the company and its stock, this is unimportant. Nevertheless, stock prices often gyrate significantly as the result of such earnings "surprises."

On possible decisions to sell a stock, stick to your long-term strategies. If you have sell-stops in place, presumably they were established when you were thinking rationally. It's hard to stay rational during the news/noise bombardment of earnings season. Don't over-react. Continue to update your sell-stops once per week or so, and rely on them to make your selling decisions for you.

On possible decisions to buy a stock, the gyrations of earnings season may provide you with a better entry point than existed a few weeks ago. If a stock on your Shopping List suffers a price decline because of an earnings miss, that may give you a bargain price to pick up some shares.

The main point is to keep your wits about you during earnings season. It will be over in a few weeks, and then you can integrate the new data into your Easy-Rate Scoresheets in a relaxed, rational fashion. The main thing is to have an overall strategy and to execute it.