6 Rules for Earnings Season

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. Fall is the time of instructions for winterizing your house, car and wardrobe, and a ton of articles about holoidays. And then it’s winter again. You get the idea.

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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, how to play earnings gaps, 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.

So today, I’ll kick into abbreviated advice mode with this short list of maxims for handling earnings season.

6 Rules for Earnings Season

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.

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.

Timothy Lutts

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