What to Watch During Earnings Season

quarterly review and outlookNext week the madness known as earnings season will be upon us once again. As we get closer to the end of this week traders will be lining up their systems to try and snatch profits out of the headlines.

I cannot imagine a sillier practice.

Risking capital on the assumption that your guess about a company’s earnings during a three-month time frame is bananas, but many billions will be wagered in just such a fashion. Using such a short-term focus to evaluate a business is just short of insanity, but there is valuable information to be gleaned from the season.

Here’s what I will be watching during earnings season.

First, I’ll keep an eye on the results released from the homebuilder and builder supply stocks. The mantra from many pundits this year has been that a housing recovery will lead the economy forward … but it hasn’t happened yet. New-home sales reports during the quarter were all over the place during the quarter, with an especially strong August. But we saw this week that pending-home sales were lower than expected, so it’s tough to draw a conclusion about the whole quarter. I also suspect a lot of discounting was used to bring buyers to the table, so earnings may not be all that strong.

The housing market is a huge tell on actual economic activity and has implications for my small banks as well, so I will be watching these numbers with great interest. (If you feel you must trade during earnings season, note that none of these stocks are cheap on historical valuation parameters — so disappointments could drive prices a lot lower.)

I will also be watching the larger money center and regional banks. A lot of the earnings growth out of these banks has come from cost-cutting and loan-loss reserve releases, and we’re getting near the end of that cycle. I want to see how much non-trading revenues pick up year over year and see how loan demand is shaping up. Again, these numbers give solid insights into the economy and show you which small banks to buy. If a regional is having trouble growing, then banks around their service area have a higher probability of seeing takeover offers as the larger regional looks to buy earnings growth in a slow market.

I will also have my buy list taped to the desk and will be reviewing it daily as the reports start to flow across the wires. There are about 100 stocks that almost qualify for my “perfect stock” or “Schloss bargain” screens but are just a little bit too expensive on a price-to-book-value basis.

While I detest short-term thinking in business and markets, in truth it often creates significant opportunities for me during earnings season. I am watching companies like Friedman Industries (FRD), Courier Corporation (CRRC), Shoe Carnival (SCVL), Superior Industries (SUP) and a host of others in hopes they run in a bad report and fall to the bargain levels where I can be a buyer.

At the time of publication, Melvin had no positions in the stocks mentioned.


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