What To Look Out For This Earnings Season

What To Look Out For This Earnings Season

Morning folks,

Earnings season kicked off last week with Netflix and the major banks all reporting. However, it’s typically week two that everyone focuses on these days as some of the most heavily weighted stocks on the S&P 500 share their numbers. Amongst companies reporting this week are:

  • Google

  • Amazon

  • Apple

  • MasterCard

  • Visa

  • Tesla

  • Microsoft

  • Facebook

  • Starbucks

  • Boeing

Plenty of big names there. On top of those, there’s a bunch of smaller companies that I’m sure many MyWallSt members will be keen to keep a close eye on like Teladoc, ServiceNow, Spotify, and iRobot.

The question I’ve been getting over the last few days is whether or not we should pay much attention to earnings at a time like this when numbers are sure to be skewed and investor emotions are running high.

Let’s start by remembering that for the long-term investor, quarterly earnings reports only represent a tiny fraction of the lifetime of their holdings. If you are, as you should be, investing for ten years, a quarterly report is some insight into one-fortieth of the time you will be an investor of that business. Does that mean we can ignore them completely? No. But it’s important to keep things in perspective.

Very occasionally you will come across an earnings report that signals a major problem for a business — serious margin contraction, the loss of a big customer, etc. Other times, you will have one of those reports where management decides to throw the kitchen sink against the wall in terms of getting the bad news out so they can take the hit and start recovering. However, the vast majority of the time, an earnings report will be a non-event. A company will either surpass its numbers by a few percentage points or miss them by such, and the stock will react accordingly.

This earnings season is surely going to be on the strangest that most investors will have ever encountered. On one hand, companies are reporting up to around the end of March. This means it was more or less business as usual (in the United States at least) for the majority of the period. On the other hand, the stock market is a forward-looking mechanism. How much are investors going to be worried about what happened over the last three months when there is so much uncertainty in front of us? You would think then that this earnings season would be all about forward-looking guidance. However, my guess will be that most companies won’t be able to tell us much in that regard. Things are still moving so quickly in terms of when social-distancing measures can be relaxed and when the economy can begin to open up again. Even then, we have no real idea of what the lasting impact of this crisis is going to look like.

So what will be the focus, if earnings and guidance are both off the table?

I suspect what investors will really be keeping an eye on balance sheets. Cash on hand and access to credit will be very important for companies over the next 12 months as we navigate this new unknown. Most of the time we like to invest in companies that aren’t burdened with debt, but in times like this, we want to see plenty of cash in the bank to ensure they will be able to survive this slowdown, particularly with interest rates so low. Competent managers will have ensured that’s the case.

As investors, all we can do is remember our investing goals and avoid emotional decisions as the next few weeks unfold.