How To Navigate Earnings Season Like A Pro

Earnings season is the period when most publicly traded companies release their quarterly earnings reports. This period can significantly influence stock prices, so with that in mind, should you be selling stocks right before earnings season?

No, do not sell stocks before earnings. Undervalued stocks have great potential to move higher post earnings. A good strategy for handling earnings season is to sell shares of stocks with a large profit cushion that have exceeded a year of holding to reduce downward volatility.

This article will explain a few of the most popular strategies for dealing with earnings reports. I will also mention how value investors can approach earnings season. In the end, I will talk about how you can determine whether a stock will go up or down before earnings.

How Earning Reports Impact Prices

Earnings filings often known as a 10-Q, for quarterly, are usually released within a month after the end of each fiscal quarter. They provide beneficial information regarding how a company is run financially and whether it’s performing well.

Based on the information gained from these earnings reports, investors can decide whether it is time to buy or sell a particular stock. Because of this, prices during this period can be very volatile. However, this also means that earnings season, if navigated correctly, can bring a lot of wealth to intelligent investors.

Earnings can negatively or positively impact the stock price depending on whether a company has met its financial goals for that quarter. However, earnings are not the only factor that determines the price of a stock. The expectations of investors for future growth are also a significant factor.

Additionally, earnings season can impact the general trajectory of the stock market. For example, when the S&P 500 index companies release their earnings, investors can adjust their projections about where that particular index is heading.

Strategies for Handling Earnings

Different investors will have different reactions both before and during earnings season. Their approach will depend on their trading strategy, knowledge of the market, experience, and many other factors.

Some investors are more reactive than others and will closely follow any news regarding the companies that they own. On the other hand, there are those investors that don’t pay as much attention to earnings reports and instead stick to the stocks that they believe will do great in the future.

Here are some strategies that I use when deciding what to do before earnings:

Ignore Earnings Reports

While earnings reports give helpful information on how a company is doing, traders often over-dramatize its significance, resulting in overly-positive or overly-negative stock prices. If you are a long-term trader, you should consider dismissing earnings reports to a certain degree and stick to the stocks that you see huge potential in.

One characteristic you need to have for this strategy to work is mental resilience. The prices during earnings can be very volatile, and you will have to put up with the lows and the highs that come with that.

Sell a Portion of Your Stock Gains

If you want to play it a little safer, you can sell a portion of your gains in stocks before they report earnings. For example, if 10% of your portfolio is in a stock that is about to report earnings, you can lower that down to around 5%. 

Doing this with all of your overvalued stocks will decrease the volatility of your portfolio and increase the chances of it weathering the storm that earnings season usually causes.

It’s also a great way to keep some dry powder ready, also known as excess cash, to jump into any stocks that may have dropped in share price while the value remained the same.

Don’t Sell Stocks With Significant Gains

If you have stocks in your portfolio that have yielded significant returns thus far, you shouldn’t seek to sell them before earnings unless they are grossly overvalued.

This way, you keep the chance to make that stock an even bigger winner, but even if the stock falls after earnings, you will never go negative because a 20%+ drop is very unlikely to happen. This is known as letting your winners run.

There are a few times where selling prior to earnings is important:

  • The stock has exceeded 20% of your total portfolio. This increases your risk in any one stock.
  • The stock has exceeded one year of holding and your tax burden has decreased. This is the time that its best to sell stocks that have large gains to take some money and move it into more undervalued stocks.
  • The underlying thesis of your investment has changed. More on this later.

Best Approaches for Value Investing

Value investing is an investment strategy that involves buying stocks whose price is lower than their intrinsic value. Value investors react a lot less dramatically to bad news and use financial analysis to determine the actual value of a stock. Many famous investors, including Warren Buffett and Charlie Munger, have used this strategy to amass significant levels of wealth.

So with that in mind, let’s take a look at how value investors should approach earnings by considering a few factors:

Remain Unfazed to Good or Bad News

Good and bad rumors about companies are often shared right before earnings. As a value investor, you shouldn’t react too heavily to them. 

While you should certainly keep up with the latest developments of the companies you hold, this news typically tells you very little about a stock’s intrinsic value, which is the most important factor for a value investor.

Keep Stocks You Think Are Undervalued

If you’re holding some undervalued stocks in your portfolio, chances are that their price will increase after earnings reports if they had a good quarter. 

Therefore, it would behoove you not to sell your undervalued stocks before earnings because you can potentially miss out on significant gains depending on how the company did that quarter.

Use Fundamental Analysis

To find these undervalued companies, you should stick away from the herd and perform fundamental analysis to determine whether a stock is overpriced or underpriced. 

After looking at metrics like price-to-earnings and price-to-book ratios and finding that a stock is selling at or above its intrinsic value, you should sell that particular stock because it doesn’t align with the philosophy of holding undervalued stocks.

What’s more, overpriced stocks will generally fall back to their intrinsic value over time, and earnings reports can be the trigger for that, which is why it is best to sell them before that happens.

A Change In Stock Thesis

When buying shares in a company its best to do so with a thesis. This essentially means buying shares only if you think there is a catalyst for the stock to rise in price. It could be any of the following:

  • Share buybacks.
  • A new product.
  • Favorable macroeconomic conditions.
  • A change in management.

If any of these have changed significantly prior to earnings it may be time to re-evaluate your decision to buy. If your thesis is no longer viable it is best to sell before earnings since it could result in a loss.

How To Determine Whether Stock Will Go Up or Down Before Earnings

It’s impossible to be sure how a stock will do after it releases earnings unless you have inside information on the reports. However, since that isn’t the case with most regular traders, here is what you can do to make an educated guess on how a stock might perform post-earnings:

Make Your Forecast

Before deciding whether you want to sell a stock, you first need to get an idea of how the price might go after the earnings announcement. To do this, you can follow a two-step process:

  • Get an idea of the informational content of the announcement
  • Determine how that information compares to the market consensus

Your forecast should also consider the general market momentum, which can overwhelm the direction of the stock. A bearish market will almost always have a negative impact on any stock, while a bullish market will have the opposite effect.

Actively Monitor the Stock

If you are holding a stock that is about to report earnings, you should follow any news related to the company weeks beforehand to get an idea of how the business is doing and how the price might change after earnings. 

In addition to that particular company, you should also follow news related to other players in that sector, particularly the most prominent companies. Large companies and their performance can have a significant impact on how a particular sector is doing.

Don’t Overthink

It is impossible to fully predict how a stock might change its price at any time, let alone during earnings season when prices are highly volatile. 

There have been many instances where I have bought a stock that had great earnings and the share price remained unchanged. Be patient, the market will eventually realize its mistake and that’s how value investors make money after all.

So, once you gather enough information and can make an educated guess on how the stock will move, you should stick to your analysis and decide to sell or hold based on that.

If you are skeptical about a company or a sector, you should consider selling most or all shares that you hold.

When To Buy During Earnings Season

There is no best time to buy during earnings season. It’s essentially a toss up on whether you should buy or sell before or after earnings season.

If you buy before earnings season and have a great deal of confidence and the share price is undervalued than its an excellent buy. However, it may also be best to wait for more information post-earnings to make a more informed decision.

Typically I wait until earnings come out when deciding how to reposition my portfolio. Since some shares rise in value while others fall. It’s all relative of course share prices are not what I base company value on. Therefore if a company becomes more valuable but the share price remains the same, it becomes an even better buy.

Final Thoughts

Earnings season is a crucial period for the stock market as it can significantly impact stock prices. 

There are many approaches to take when deciding whether to sell stocks before earnings: you can completely ignore the earnings reports, shave off some stock gains, or keep the major winners in your portfolio while selling the rest.

It is best to find a balance between selling and holding. To do so, you can hold the stocks that have yielded the most significant returns and avoid taxes while selling those that are negative or brought minor gains.

Bryan Shealy

Bryan Shealy is an active value investor. He currently focuses on the small and micro cap stock market looking for bargains. He has written content for Seeking Alpha, Net Net Hunter and Broken Leg Investing.

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