How to Get Through Earnings Season With Your Sanity Intact

by Tim Melvin | October 9, 2013 1:27 pm

One of the silliest questions I am ever asked is “How I am going to approach the start of earnings season?” My stock answer? “With a nice glass of wine and a good book.”

Wall Street’s obsession with the quarterly numbers crunch of earnings season is not only ridiculous to me, but also unhealthy for investors and the capital markets as whole. Far too many investors and traders are willing to make bets based on the amount by which a particular company beats or misses analyst estimates for a three-month period.

Given that the analyst targets themselves have been proven to be relatively inaccurate, this strikes me as betting on which blind horse finds the finish line first.

Nonetheless, hundreds of billions will be bet on the individual highlights and lowlights of earnings season during the next five or six weeks.

Not only is this generally unhealthy for the net worth of the majority of gamblers speculators, but it unduly influences the executives running the companies. When the largest part of your eventual compensation is tied to higher stock prices via options and stock grants, it is easy to be influenced to pump up the short-term number at the cost of the business’ long-term prospects.

But a business’ life span is measured in decades — not weeks — and quarterly numbers are just a snapshot of a good company’s life.

I read the quarterly reports of my companies. I want to know if business is better or still suffering in some way. I want to check the financial condition of the stocks I own so I can be sure they are still financially healthy enough to survive until they thrive.

But it’s highly unlikely that anything in the earnings report will cause me to buy or sell shares of a company I own. I care much more about what happens to the balance sheet over time than I do about whether my company missed or exceeded analysts’ estimates.

However, I am always hopeful about one thing as we get into earnings season — that some of the stocks on my watch list will miss earnings badly and see their stock priced punished horribly.

For instance, I would love to see Sterling Construction (STRL[1]) miss the always highly accurate estimates and get pummeled. Why? Because I really like the company, and would love to see other panicked investors smite shares down about 20% so I can buy below tangible book value.

I could care less about whether earnings for Apple (AAPL[2]) or Google (GOOG[3]) come in a penny shy … but I would love to see International Shipholding (ISH[4]) report profits well below estimates so I can buy more stock cheaper.

As with all of my investing efforts, I find it far more profitable to approach earnings season with a stockpile of cash and react to any opportunities created by disappointed traders than to try to predict what might happen in the short-term.

As of this writing, Tim Melvin was long ISH.

  1. STRL:
  2. AAPL:
  3. GOOG:
  4. ISH:

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