Less bad than expected

This is the time of year when companies report how they did last quarter. It’s referred to as “earnings season.”

There’s nothing magical that happens in a single quarter to business in general, but Wall Street pays a lot of attention to quarterly reports.

Its amusing to watch.

Wall Street analysts try to guess (and I use that term intentionally) what companies will earn in a quarter. There is a lot of focus on these estimates because most people trade securities every 6 months.

If a company beats Wall Street “expectations,” the stock price tends to jump. If a company misses “expectations,” its price usually tanks.

Keep in mind that the fundamental value of a business changes very little over a single quarter. A company is worth it’s earnings into the infinite future. What it does this quarter is, at best, meaningful to less than 5% of a company’s value.

But, if you hold a stock for only 6 months, like most market participants do, then those quarterly estimates and price moves become vitally important. Why play that game?

I don’t. I pay attention to long term business value. I tend to hold companies for 3 to 5 years on average. The reason I buy is because a company seems to be selling far below its mathematically assessed value. I sell because someone is willing to pay much more than think it’s worth.

I don’t guess what will happen in one quarter. I don’t hold for 6 months. I don’t play that game.

This quarter has been particularly amusing to watch because companies are reporting earnings that are less bad than Wall Street expects.

That wording is also intentional. The companies aren’t doing a lot better, they are just doing a lot less bad than Wall Street expects.

These are meaningful moves. When USG (full disclosure: my clients and I own shares of USG) reported earnings on Tuesday, its price jumped 25.4% in one day. When Mohawk (full disclosure: my clients and I own shares of Mohawk) reported earnings today, its price jumped over 33% (as of 1:51 Mountain Standard Time).

Did these companies report record earnings? No, they reported big losses. Did they forecast huge sales and earnings increases in the short term future? No, they both said the economy looks terrible and they don’t know when end demand will pick up.

Did these two companies become 25-30% more valuable simply by reporting losses and dire outlooks? No, of course they didn’t. They just reported less bad earnings and expectations than expected.

If you ever think markets are rational and that most market participants thoughtfully consider the prices they buy and sell securities, just remember these examples of how short term and silly Wall Street and most market participants can be.

I must admit, its amusing to watch….

Nothing in this blog should be considered investment, financial, tax, or legal advice. The opinions, estimates and projections contained herein are subject to change without notice. Information throughout this blog has been obtained from sources believed to be accurate and reliable, but such accuracy cannot be guaranteed.