What makes markets move?  Most people will say “news”, and that’s true.  But some news moves the markets more than others.  One of those news events is the Earnings Report, when a company reports how it’s doing financially, and how it expects to do in the future.

Virtually all traders will agree that an earnings report can be one of the most impactful events that a stock experiences, in either positive or negative ways. That’s why it’s one of the critical things to watch for when trading stocks.

We have a great advantage when preparing for earnings reports that we do not have with other news.  That is, we know in advance exactly when it’s coming.  We even get some insight into what to expect from the report.  Compared to other news, which can come out of the blue with no warning, an earnings report is something that can often be planned for. We can never totally anticipate what the earnings results will be, but there are some strategies that can profit from the stock movement as the earnings date nears, as well as after the news is released.

But we’re getting a bit ahead of ourselves here.  First, let’s talk about what an earnings report is.

What is an Earnings Report?

Earnings are reported by publicly traded companies to share their financials over a given reporting period.  It’s typically done as a press release coordinated with an electronic filing to the SEC’s online EDGAR system, and is often followed by additional written and/or verbal information.

This isn’t som

ething that the company chooses to do without reason.  They’re legally required to file quarterly reports, sometimes referred to as SEC Form 10-Q, as well as an annual report, known as a 10-K.

When are these filed?  A company typically makes 3 quarterly filings and one annual filing per year.  Quarterly reports are due within a certain time following the quarter close.  That’s typically 40 days.  They get a little more time afte

r the 4th quarter close to complete the annual filing – typically 60 days.

Most companies end their financial year on December 31st, so quarterly earnings reports usually follow the close of March, June, September, and the annual report follows a December close.  If a company’s financial year ends on a day other than Dec 31st, then it follows that company’s financial calendar, still with a report due about every 90 days.

Since most companies are on the same reporting schedule, we have a period where we anticipate a large number of companies reporting around the same time.  This is often referred to as “Earnings Season”, and happens 4 times per year.

What’s In an Earnings Report?

The Securities Exchange Commission (SEC) requires that the quarterly filings include specific data points relating to financials.    One of the most important numbers is the EPS, or Earnings Per Share, which is how much the company made or loss per the number of outstanding shares.

EPS provides a way to normalize the profit or loss of a company regardless of the company’s size.  This allows easy comparison between a large company, like Apple, and a smaller company.  The per-share earnings figure lets us see what the relative gain is independent of size.  This way, we can identify the companies that are more profitable from those that are losing money, regardless of the company size.  If Company A is making 15 cents per share, and Company B is making 30 cents per share, we can see that Company B was twice as profitable per share over the last quarter, regardless of how big either company is.

Earnings Per Share doesn’t need to be a positive number.  In fact, many newly-started companies have negative earnings per share, indicating that the company is currently losing money, spending more money than it’s taking in.

Why would someone be interested in investing in a company that has negative earnings?  Because investors aren’t just interested in what the company made in the last quarter.  They’re also interested in what’s projected in future earnings.

When a company first starts out, there are a lot of overhead “startup” costs that make it more difficult to generate a profit.  Also, a new company may have few products available for sale, or they lack the ability to generate large quantities of their product, even if it’s selling well.  If the costs to run the company and cost of the goods to make the products exceed the profits generated in sales, then we’re very unlikely to see a profit. However, investors know that a good product can generate more income if there’s potential for the product to expand its sales in the future.  That could be in the development of new products, or increasing production of existing products so that overall sales – and profits – can be increased.

So how do we identify a company that has promise when earnings aren’t yet positive?  Easy!  We can compare the previous performance to the current performance.  We can look at the last quarter’s EPS as well as the EPS from a year ago, and see if it’s improving.  While earnings might be -2 cents per share this quarter, if they were -3 cents per share in the previous quarter and -7c in the quarterly report a year ago, then we could anticipate that this company is well on its way to becoming more profitable, even if its EPS numbers still report a loss.

This is the same thing as looking at a company that is profitable.  For example, if company XYZ is worth 17 cents for share this quarter, and it was 15 cents per share last quarter, we can determine that we had a 2 cent rise over the last quarter, which is a 13% increase.  Similarly, we can calculate the company that made -3 cents last quarter that’s now making -2 cents per quarter had a 33% improvement.

This is why the relative nature of the current report to past reports is important.  Many people analyze stocks by comparing the most recent report to the previous one, and to the one from a year ago.  This gives a combined recent and longer-term view.  If we continue to do this quarter after quarter, we can start to identify a growth rate, or path, that helps us anticipate where this company’s profitability is headed.

The Future Looks Bright… Perhaps?

Comparing numbers can be simple due to their obvious nature.  Some people would say the numbers speak for themselves.

The more challenging part of evaluating an earnings report is how to interpret what the company is saying about the future. As part of their earnings statement, companies provide forward-looking speculative information, which attempts to predict where they see future earnings going.  Company XYZ may be report 17 cents earnings this quarter, and they may project that they expect to make 18 cents next quarter.  They can also give non-numerical guidance, to let investors know what is ahead for the company regarding contracts, product announcements, and more.  They can also give warnings that could negatively impact the future profitability of the company.  It’s the combined “whole picture” that gives the best outlook, though much of it is speculative and subject to interpretation.

With all of this information, the company projects an idea of what it expects.  This can be positive or negative news.  If XYZ expects earnings to be 16 cents next quarter, down a penny, they can alert those interested in that in advance, which sets expectations for the next report.

As you can imagine, “negative” information can make people less likely to want to invest in the stock.  So, as people who want to invest in companies with increasing EPS move their money into other stocks, XYZ feels negative price pressure as the share price drops on share selling.

If a company’s previously announced expected price isn’t what’s reported as the actual number at the next earnings release, it can have a dramatic impact on the price.  If it’s greatly above, we get a surprise that often sends the stock price higher. If it misses its target substantially (and sometimes even when it just meets the expected target), it can have a surprisingly negative impact to the share price.

This is why earnings can have such a great impact on stock prices.  It gives us data about how well the company is doing compared to the past, as well as projecting what the profitability of the company is going to be in the future.  When the projected amount is revealed at the next release, the market reacts.

Slow and Steady

Since these data points can greatly impact the desire to own shares of the company, which impacts the share price, the numbers are treated with great care by the company.  In fact, many companies will adjust how they’re run in order to get smooth, predictable, steady growth.

This is especially true in larger companies.  Some “blue chip” companies take pride in being able to say that they have had positive EPS growth over the past n quarters.  And in fact, that is very attractive to the people who are looking to invest longer-term in companies.  That, and of course the dividend that the company provides, can be a great way to keep investors striving to own shares of a company, encouraging long term growth.  While this is often slow growth, it is steady growth, and it attracts the larger sums of money put into the markets.

You can imagine that a large company that is experienced in controlling their earnings this way has excellent financial controls.  They have the ability to cool or heat up spending based on sales so they smooth out the spikes, and therefore achieve the smooth, more predictable growth that their investors expect.

For example, let’s say a company is having an unexpectedly profitable first quarter, and by the beginning of March, they’re seeing unusually high sales risk raising the EPS higher than anticipated.  With financial data readily available to them, they can recognize that sales are too high, and increase their spending before the end of the quarter to eat up some of those high sales.  This has the effect of removing the spike so they get the smooth rise in EPS that they projected.  There are many ways that they can smooth out spikes and valleys, but the end result is the same – the projected quarterly EPS is met – or even better, slightly beat.

Some investors might be frustrated by such artificial corporate control, and would prefer that the company report great unusual earnings.  After all, that would be a surprise at the earnings announcement, and would surely send the stock price through the roof.  Sure, that would be great for the current quarter.  But what happens next quarter, and a year from now?  Those reports will surely be compared to the spike that was experienced in that one quarter.  When the next quarter comes in with the typical earnings that had been seen in the past, the investors feel that the company isn’t performing as well as the past quarter or past year, and start to move their money elsewhere, deflating the stock price.

This is why slow and steady, smooth growth is what’s targeted, and often achieved by more mature companies.  And that’s great for long-term investors who just want slow and steady growth.  No surprises.  This is helpful for those who have a huge portfolio, where even a small gain can make a difference.

But if you don’t have a multi-million-dollar portfolio already, this type of gain isn’t going to get your account moving to where you want it to be.   You need something more.

Trading Earnings for the Short-Term Traders

It’s useful to know the slow growth approaches, but what many traders need is a way to take advantage of the surprises, too.

Short-term traders aren’t interested in slow and steady.  They’re not going to want to put their money into something that’s going to inch higher.  They want to profit from the drama of earnings surprises, which are just the opposite of what’s described in the slow-and-steady example, above.

To get explosive moves, short term traders want to find companies that beat their projected earnings by a mile, making the stock price soar temporarily.  They’re not trying to buy and hold.  They get in on that move, and take the profits.  Some short-term traders will even pocket the gains, and then reverse their trade at the next earnings announcement, anticipating that there will be a miss, and trade profitably on a surprise earnings “miss” that sends the stock lower.

Each of these approaches, benefiting from slow and steady growth, or trading earnings surprises, take specific strategies to trade them.  Both of them can be profitably traded, as long as you know how.  You want to know how to trade both types, for most traders have some of their investment money in longer term trades, and some of their money in short-term trades.

But where can you find out more about trading Earnings, and profiting from all types of earnings?

Learn How Now

At Basecamp Trading, Dave, our Stocks and Options specialist, has tremendous experience in successfully trading earnings, as well as years of experience working within big investing companies, personally managing millions of dollars in client trading accounts.

Dave has developed a set of strategies that take advantage of earnings moves that have proven results.  It’s called Earnings Power Play, and he’s opening up access to this program right now to a limited number of people, and at a very special price.

This is your opportunity to capitalize on the predictable earnings report schedule required by law to be produced every quarter.   If you don’t know how to profit from these reports that can send markets flying, you’re missing out on gains every quarter.

That’s an opportunity you’re missing out on 4 times a year if you don’t know how to trade earnings.  Those who do know how to trade earnings get the opportunity to put money into their account every 3 months, like clockwork.

Get smart about trading earnings now, and you can start to profit by the next cycle within the next 90 days. This is your opportunity to finally learn how to take advantage of earnings reports, using Dave’s proven Earnings Power Play system. And I know we’re not supposed to get emotional about our trading, but some of these earnings plays can be more exciting and lucrative than other types of trading.  And at this great price, it’s never been a better time to learn how to make it work for you.

Click here to learn more about how you can get started right away, and capitalize on the next cycle of profit-generating earnings that’s just around the corner.  Get started today!

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