6 Rules for Earnings Season

Stock Market Video

6 Rules for Earnings Season

This Week’s Fortune Cookie

In Case You Missed It

In this week’s video, I look at the good week in the market and how it’s back on top of its moving averages. But markets are also trading in medium-term ranges, and the old leaders are not leading any more. I look at a few commodity and energy stocks and one kicker that’s riding a wave of merger enthusiasm. Click below to watch the video.

6 Rules for Earnings Season

It’s a great privilege to have a forum like Weekend Cabot Wealth Advisory to write for each week. Despite my obvious bias toward growth investing, I try to give all investing styles their due.

But there are some topics that just keep coming up, and some issues that seem to need addressing over and over again. I don’t get tired of writing what needs to be written, although I sometimes wonder if you get tired of reading these repeated warnings, admonitions and advice.

In some ways, my job is a lot like that of a features editor at a newspaper. (You remember newspapers, right? Daily bundle printed on bad paper thrown into your bushes or onto your roof every day?)

A good features editor has to come up with a constant flow of interesting story ideas, but he has a great ally in the calendar. The changing of the seasons provides the material for timely and vital stories. As spring rolls around, it’s all about lawns and gardens, summer fashions, potholes, new boats and bicycles and the like. Summer brings mosquito warnings, sunburn warnings, ideas for day trips and vacations, keeping your car (and its tires!) in tip-top shape, and on and on. Fall is the time of instructions for winterizing your house, car and wardrobe, and a ton of articles about Halloween, Thanksgiving and Christmas, with a sprinkle of Hannukah and Kwanzaa thrown in for good measure. And then it’s winter again. You get the idea.

If I were a features editor for a financial newsletter, which I guess I am, I would have four occasions every year to write about earnings season, what to look for, what to avoid and how to play the beats and misses. Every May, I could write about selling and going away. Every meeting of the Fed and the other central banks around the globe might prompt a story on interest rate policy. And every major market move, especially from bull market to bear market and back again, would need explanation and advice.

And the recurring themes would always be there: knowing growth from value (and which style suits your investing personality), picking strong stocks, avoiding market traps, buying techniques and selling disciplines in every possible style and a constant flow of stock picks.

I don’t have a feature editor’s calendar, but the calendar frequently kicks me in the sit-down and tells me to write something.

Right now, with high-profile quarterly reports from Apple (a big win) and Facebook (ditto) on everyone’s mind, I’ll kick into abbreviated advice mode with this short list of maxims for handling quarterly reports.

1. Don’t buy full positions just ahead of a quarterly report. There’s no sense in making a bet on a coin flip, and there are no experts who can repeatedly predict the reaction a stock will have to its report.

2. Don’t worry too much about the actual numbers; the stock’s chart will tell you what you need to know. The reaction is crucial, the numbers are only artifacts.

3. A big win will often give a growth stock a burst of energy that will lead to higher prices over time. Don’t fret that you’ve missed the big move, just take the opportunity to ride the stock’s momentum. 

4. If you’re worried about an impending report from a company whose stock you own, consider lightening up on your exposure. A little profit taking is an excellent sleep aid when a reporting date looms.

5. Remember that the general tendency of the market is still important. In a bearish phase, keeping some cash on the sidelines will pay dividends when the bulls return. Having a bear in charge lowers your odds.

6. And lastly, if one of your stocks tanks after a revenue or earnings miss, pull the darned trigger and sell it! Holding for the bounce or just holding on hoping can kill your results. (See the Fortune Cookie below).

Yes, earnings season can be tricky and treacherous, but if you follow some simple guidelines like those above, it can actually prove to be a time of great opportunity.

Here’s this week’s Fortune Cookie. Remember, you can always view all previous Fortune Cookies here and Contrary Opinion buttons here.

Tim’s Comment: Too many investors let their egos interfere with their investing, and the result is that they argue with the market instead of listening to it. The fact is, the market is always right, so sometimes you won’t be, and that’s okay—you should expect to be wrong sometimes. Expecting this, you should work to minimize your losses when you are wrong, and when you’ve mastered this principle, it’s easier to maximize your gains when you’re right!

Paul’s Comment: The ways to go wrong in growth investing are virtually unlimited, but two really stand out. The first one is to sell your winners too fast. Small profits can only become big ones if you have patience. But once you’ve learned to let your winners run, you run up against The Big One, the stone tablet commandment that sends more portfolios to hell than any other: Thou Shalt Cut Thy Losses Short! Remember that if a stock declines by 20%, it has to go up 25% to get back to even. And if it drops 50%, it has to climb 100% to break even again. Sell those losers quickly!

In case you didn’t get a chance to read all the issues of Cabot Wealth Advisory this week and want to catch up on any investing and stock tips you might have missed, there are links below to each issue.

Cabot Wealth Advisory 4/21/14—Let’s Buy Canada!

Cabot Stock of the Month’s Chief Analyst, Tim Lutts, makes a modest proposal in this issue: the merger of the United States and Canada. Tim sees advantages, but little probability that it will happen any time soon. Stock discussed: Magna International (MGA).

Cabot Wealth Advisory 4/22/14—4 Traps for Your Retirement Account 

In this issue, I tee off on one of my favorite topics, the advantages of making your own investing decisions in your retirement account. You have the flexibility to do things your mutual fund company can’t. Stock discussed: AerCap Holdings (AER).

Cabot Wealth Advisory 4/24/14—The Secret to Moving Averages

Chief Analyst Mike Cintolo of Cabot Market Letter details how a stock’s moving averages can help you make informed buying and selling decisions. Stock discussed: Arris Group (ARRS).

Have a great weekend,

Paul Goodwin
Chief Analyst, Cabot China &Emerging Markets Report
and Editor of Cabot Wealth Advisory

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