Earnings Season Simplified: 7 Key Strategies for Easy Navigation

Stock traders are enthusiastic about the financial reports every quarter. This period, lasting for several weeks, allows people to gain in-depth insights into the performance of major companies.

Data of interest in the company's financial reports includes:

• Net income

• Revenue

• Earnings per share

• Outlook for the remaining quarter and the entire fiscal year

During the earnings season, traders can track the dynamics of companies on their watchlists and the corresponding indices at any time. For example, Apple is one of the large companies included in the Nasdaq 100 index.

Therefore, when the company records significant growth in its financial reports, traders are likely to have a positive outlook on the stock.

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Key Data Traders Should Pay Attention To

1. Company, Date, and Time

Firstly, you need to know the specific date and time when the company you are following will release its performance. Companies typically announce their results before, during, or after trading hours.

2. Forward-looking Expected Data

Next, you should check the forward-looking expectations of market professionals in advance. Prior to a company announcing its performance, Wall Street firms predict its revenue and earnings per share (EPS). In the financial reports of U.S. companies, EPS growth and annual revenue growth are the two most crucial indicators, serving as key reference points for assessing a company's profitability and business expansion prospects.

3. Key Financial Metrics

• Income Statement (Profit and Loss): Highlights funds generated from sales revenue and net income, allowing estimation of current and upcoming quarter revenue.

• Balance Sheet: Emphasizes the company's financial health during a specific period, indicating liabilities, assets, shareholder equity, total liabilities, total assets, short-term liabilities, and assets.

• Cash Flow Statement: Focuses on cash inflows and outflows, providing insight into a company's fund sources and direction. Though not as critical as other statements, it remains essential for traders.

4. Additional Metrics

Despite strong performance, a company's stock price can sometimes drop due to investor focus on factors beyond revenue.

Investors closely monitor performance guidance, reacting to downward shifts by selling and upward adjustments by buying more stocks.

Industries have specific focuses:

• Retail and restaurants emphasize same-store sales; a decline, even with exceeded revenue, may lead to selling.

• Technology companies prioritize active user numbers; for example, Twitter's revenue drop was offset by a stock price rise due to increased users.

• Core business impact, such as $Apple(AAPL)$ 's iPhone sales, $Netflix(NFLX)$ user numbers, $NVIDIA Corp(NVDA)$ 's data center revenue, and $Tesla Motors(TSLA)$'s vehicle deliveries, signals industry strength or weakness against competitors.

Additionally, events like management changes, new products, or mergers can influence stock performance.

5. Competitors

Monitoring the performance of similar companies is crucial because most industry peers tend to follow similar trends. For example, if investment banks like Goldman Sachs report an increase in trading revenue and raise their performance guidance, it is likely that their competitor, Morgan Stanley, will also see an improvement in performance. Therefore, if Goldman Sachs performs well, you might consider a bullish outlook on Morgan Stanley.

6. Bullish/Bearish/Hedging Options Strategies

Options such as call and put options can be used to replicate long and short positions. If you anticipate an increase in the security's price after the earnings report, investors can buy call options. Conversely, if the value of the stock is expected to decrease, purchasing put contracts is an alternative. If you own the common stock of a company, overlaying hedging options strategies can reduce volatility stemming from earnings data.

7. Stop Loss to Protect Your Account

In stock trading, the volatility during earnings season is typically substantial, as it is the period when investors decide whether to increase, hold, or sell their stocks. Therefore, setting stop-loss orders in each of your stock transactions is crucial to safeguard your account. Your stop-loss point should be at a level where you are confident that the resulting loss will not significantly impact your financial situation. As an investor, carefully evaluating your risk-return ratio is essential.