Earnings Calls 202
Earnings Calls Within Your Comfort Zone
For many successful traders, one of the best strategies is ONLY trading within your comfort zone. Having information that others need hours of research just to partially understand is extremely valuable! Additionally, there should be very little that can surprise you and it should be easier to catch an overexaggerating of information (that is a corporate way of saying lying).
For some, this strategy is boring because their comfort zone, or scope of knowledge, is relatively limited. So What!! There are literally thousands of publicly traded companies. With some time and dedication, you should be able to find an industry or small sector of familiarity. Even if your knowledge may not be 100%, even a 5% edge of information can help more than you would imagine.
Best example to reinforce this would be Las Vegas’ casino odds. Most games do not have a significant house advantage; however, even a slight edge is enough to keep the cash flowing!
All that said, what should someone do as they listen live to an Earnings Call of a company within their comfort zone?
Sniff out the Bull$h!t
Your main job during all sections except the CFO’s review of the financials will be to sniff out the bull$h!t.
Generally lead by the President or CEO, the prepared statements are painting as pretty a picture of reality as possible before transitioning into the hard truths of the financials. A good speaker with a million-dollar PR and Marketing teams can spin a bad situation into a decent story that many ignorant traders will blindly believe.
It is your job as a trader in your realm of knowledge is to decipher fact vs corporate-fact. We stress corporate-fact instead of fiction because a blatant lie is different, and way more jail time, than a positive spin on a negative moment.
If the Executive speaking is promising construction completion sooner than feasible, you should know that will be bad during the next earnings call. If the Executive is stressing how good the new product launch will be; however, you see dust piled on their stuff at your local store, you should know that will be bad during the next earnings call.
On the other hand, an Executive team sometimes underestimate the achievements of their company, allowing traders to buy before the rest of the market realizes. If you know a company’s newest product is sold out every where, chances are next earnings call might have good financials - or going one step deeper, the company supplying a majority of the components for the product will have great financials.
Sniffing out the bull$h!t during the prepared statements can add to the intrinsic edge you already have as well as save or make some money if played right.
Keep in mind, there is always an example or two of calls where nothing is fabricated or exaggerated. There is nothing better than an honest and straightforward leadership team!
Over the decades, there have been a number of regulations implemented to keep companies from lying to investors. A significant majority of these regulations, including harsh jail time, were focused on the corporate financials. As a result, it is much harder for companies to “play with the books” than it was in the past.
Imagine having to review the financials as well as worry about the numbers being fake…
That said, there are still a number of fraudulent operations around the world, with a realistic possibility that one of those fraudulent companies is publicly traded. Though Sniffing out the bull$h!t is not a required step during the financials, NEVER blindly take any information as fact. Any additional validation you can add to any information will only help!
Unscripted Questions and Answers
It is easy to argue that the most valuable section of the Earnings Call is at the end when the call opens up to the participants. The questions and answers exchanged generally add an extra layer of information that can be very useful. Again, most publicly traded companies spend millions in marketing and public relations to keep a positive image and spin on all information the company presents. It is significantly harder to do this when an unscripted question is asked live and must be answered directly from one of the Executives.
Many of the questions are asked by professionals working some of the biggest hedge funds and firms in the world who have a deep knowledge of the company. Remember these billion dollar firms have the money to hire people to dedicate themselves to a few stocks. That said, your level of knowledge should make you comfortable enough to join the waitlist and ask anything you feel would add value to your ultimate decision - is this company worth may hard earned money?
There may be time limitations that do not allow all questions to be addressed live, or there can even be a limit of questions allowing more people to speak.
Again, absorb all that you can from the unscripted Q&A exchange. Some of the conversations may end up being more than your level of knowledge on the subject, but that is nothing a little time and research cannot solve.
