"What is Earnings Season?" from Left Brain Investment Research

Hello and welcome to Fundamentals of Investing from Left Brain Investment Research. Today we'll answer: What is earnings season? I'm Brian Dress, Director of Research here at Left Brain Investment Research. In this series, we define key terms that we view important for investors to understand. Today we gear up for the upcoming third quarter results by answering: What is earnings season? In the U.S. and in most developed countries, regulators require public companies to announce business results to investors on a periodic basis. In the US, the Securities and Exchange Commission, or SEC, requires a public company to deliver an earnings report 4 times per year after each business quarter. Every quarter, earnings season kicks off a couple of weeks after the close of the fiscal quarter, giving companies time to compile accounting results into a digestible format. For 2 to 3 weeks each quarter in the months of January, April, July, and October, investors receive a barrage of financial data in the form of company earnings reports, conference calls, and company presentations. Earnings season is the opportunity for investors to gain insights on companies in the stock market, as well as broader market trends. At Left Brain, we use earnings season as our best chance to look for insights on the business and financial trajectories of the companies that we follow. Earnings season is our chance to hear directly from the management of public companies. On the publicly available conference call that accompanies each earnings report, we hear a direct explanation of the quarter's results from top executives. Along with their answers to analyst questions, we are able to draw conclusions about the trends in their businesses, as well as the macroeconomic environment that faces the sector in which the company operates. Some examples of what we are looking for through the left-brain lens: accelerations in revenue growth rates, changes in profitability, new customer wins, and updates on the competitive dynamics in their industry groupings. Earnings reports can be market-moving events. A good example of this phenomenon comes in the form of the Salesforce.com Q2 2020 earnings report. Unlike many other financial firms, Left Brain does not try to forecast quarterly earnings reactions. Many analysts had given up on Salesforce, which underperformed many other cloud software stocks, nearly able to track the NASDAQ index, which is represented with the red line in the chart, in the months after the market trough in March. Expectations for the Salesforce report were diminished based on nothing but the stock price. As you can see from the second chart inside the red circle as we zoom out, CRM stock jumped more than 35% in a single day on strong results. Because of our previous conviction based on the fundamental case of the business, we retained our green light rating going into the report, and we were rewarded for our patience. Some investors would sell into that type of market strength, but at Left Brain, we view this action in the exact opposite way. This is great confirmation that we should remain bullish on the stock. Market-moving events like this in stocks we follow will usually be accompanied by an LBIR Fresh Look report in the 1 to 2 weeks following the earnings report. A caveat. A quarterly earnings report represents only a snapshot in time. If and when a company releases a surprisingly positive or negative earnings report, we take that under advisement, but one point in time does not a trend make. A word of warning of how not to use earnings reports. You won't see Left Brain comparing quarterly results to the forecasts of Wall Street sell-side analysts. We view the whole beat and raise game played on Wall Street for decades as a fool's errand that fails to use the valuable information in an earnings report in the most illuminating way possible. However, when we see material changes to a company's fortune for a series of quarters running, we will begin to adjust our thesis of a given investment. After 2 to 3 bad quarters in a row, we are forced to put a company in a penalty box, putting any new purchases on hold and reexamining whether that stock belongs in client portfolios. Here at Left Brain, we continuously follow 40 to 50 companies, which we review on a quarterly basis. When we determine that a quarterly report represents a material change in a company's fortunes, we will produce what we call a Fresh Look report, where we communicate our findings to the broader investment public. These reports are the basis on which we make post-earnings portfolio decisions on companies under our coverage. The traditional kickoff of earnings season is the report of aluminum producer Alcoa, ticker AA. So look for the Alcoa report as the unofficial beginning of the deluge of earnings reports. The important takeaway on earnings season: the information distributed in this time is vital to an investor's understanding of individual stocks. However, We want to caution investors not to get caught up in the beat-and-raise game that Wall Street analysts like to play. The real value from earnings reports come in the deeper analysis of the trends in management's tone and storytelling. We hope this explanation helps you understand the context of earnings season, the most important weeks on the calendar for investors. For more foundational videos like this one, along with analysis of individual investments, click the subscribe button below. You'll get the latest from LBIR and have a chance to become part of our growing community of left-brainers. Who experience the informed decisions and independent thought that powers our search for profitable investment opportunities. Learn more at our website, www.leftbrainir.com. This is Brian Dress of Left Brain Investment Research for Fundamentals in Investing. Thank you and see you next time.