Learning How to Earn with Earnings: Profiting from 10-Q Press Releases
Few skills are more important to savvy investors than the ability to read an earnings press release. Of course, some of the best financial analysts in the world spend their entire lives developing the ability to strain truth and predictability from earnings reports. But, fortunately, you don’t need a degree in Finance to extract the core information from these vital pieces of documentation.
You may already know the basics: publicly traded companies in the United States are required by law to report their financial status on a regular basis. This includes a quarterly report (the 10-Q), and an annual report (the 10-K).
These reports are highly detailed documents: they contain information on income, cash flow, sales, balance sheet, future plans and projections, and executive commentary on the state of the firm. Seasoned investors know that any information in an earnings report should be taken with several grains of salt. While legally required to be truthful in their reporting, companies have every reason to use their earnings documents to paint the rosiest picture possible. Information in earnings reports will always be reported in the most favorable possible light for the firm in question.
Especially for larger companies, these quarterly reports can be 100’s of pages long. For quicker digestion, companies typically issue a much shorter press release alongside their formal reporting documents. This press release typically contains the “highlights” of the formal reporting, including headline financial outcomes and a choice quote or two from key decisionmakers.
These press releases are absolutely integral for news-based traders looking to buy off of earnings news events. Here’s the key fact: no one, not even the biggest hedge funds in the world can fully digest the complexity of the entire earnings document in a few hours. This fact means that, for some period of time after a given earnings report, the press release itself can drive the market’s narrative for the firm in question. And, while a company will make every effort to present its results in the best possible light, they still typically give away the broad tenor of their performance: positive or negative.
It’s that core interpretation, positive or negative, that determines the profitable course of events for news-based stock traders. Sometimes, this interpretation is clear-cut: plummeting revenue for an already struggling firm or a sudden explosion of sales for a startup. But developing a strategy for evaluating and trading on more nuanced earnings news (as revealed even at the basic level of the press release) is vital for maximizing profits in this arena. Here are some deeper concerns to keep in mind:
- Competition Rules: Sometimes, earnings growth isn’t enough if investors see obvious competitive threats around the corner. In recent months, for instance, we’ve seen retail stocks fall after posting strong overall earnings because of disappointing digital sales growth. In this sector, investors appear far more focused on any given stock’s ability to compete with Amazon than its short-term revenue flow.
- The Future Matters: We routinely see stocks that beat current quarter earnings projections but fall after revising their projections for future quarters down. Watch for any language regarding future projections in earnings releases. You can bet that a company proactively tamping down its own expectations sees trouble on the horizon (or at least sees its own stock as overvalued).
- The Fudge-Word Factor: Read skeptically! Executives looking to be legally truthful but minimize bad news aren’t likely to come out and say “we really messed up last quarter.” Instead of “costs are skyrocketing,” look for “we’re working to alleviate acute pricing pressure.” Instead of “we’re going bankrupt,” look for “if current trends continue, executives will explore the full range of alternatives for maximizing shareholder value from our current assets.”
News Quantified users can profit from thousands of different earnings announcements every quarter. Earnings news trading, however, is only one of many methods for using the synthesis of real-time news and market data to find market-beating profits. You can learn more about the diversity of strategies available to news-based traders in one of our totally free virtual training sessions. Claim a spot using the button below: