Wednesday, December 20, 2017
12:00PM / Investdata Consulting
What should investors look out for in the next major earnings reporting season in 2018, especially with improved company and market fundamentals as reflected in the numbers emanating from quoted companies and reactions to such from market forces in form of price performance and traded volume that had shown increased activities and demand for stocks, when compared to the situation in the three previous years of down market.
Investdata Research shows that traders are interested in market reactions to earnings during earnings seasons, but the momentum of this reaction depends on the numbers posted and the period. Markets react faster and longer to full-year scorecards than quarterly reports, due to rewards that accompany such in the form of cash dividend or bonus shares, which are of interest to most investors. The behavioral pattern of investors and the market at this point is what traders benefit from, while trading earnings season. It is juicier when companies releasing numbers that beat market expectation when accompanied with good payouts.
Ahead of the 2018 earnings season, many sectors have so far shown potentials of higher payout due to impressive numbers released so far especially the direct beneficiaries of the Central Bank of Nigeria (CBN) intervention in the foreign exchange market that resulted in stable exchange rate regime, impacting positively on stocks in the manufacturing, banking, agriculture and healthcare sectors, among others.
While seeking to position for robust returns in 2018, investors should go back to the performance of stocks in question in previous quarters to review the pattern within their current financial year. In other words, you should be asking questions like: What has the earnings trend been like in the last two or three quarters? What were the last full-year’s Earnings Per Share (EPS) and dividend payout like? Such information would give insights into what to expect from the particular company.
Please note that companies with consistent incremental performances are most suitable for investment purposes, given their probability of better last quarter performances. You might choose to dwell on the reasons for the inconsistent performance patterns, including the fact that some companies do have cyclical sales trends for which reason the quarterly performances are bound to vary sharply. Take note of such stocks and act accordingly.
Add up the three quarter earnings that you now have, to see what the average performances would be. Or, better still, find the average of the last four quarters, that is, add the three quarters of current year and the fourth for previous year, then divide your answer by four to get the average. This is important to project what the dividend possibilities are. To do this right, you might now need to consider previous year’s performances to see any similar trend or divergence. Companies with identical trends with previous years’ performance level are easier to predict than those with divergent trends. In cases of divergence, find out what the issues are so as to take advantages or cut your loss swiftly.
The industry wherein the companies you are researching on operate is key. For example, manufacturing companies tend to release audited reports to the market faster than banks and insurance stocks. Equities like Vitafoam, Forte Oil, United Capital, and Nestle as well as in some cases, Cadbury are known to be among early fliers in the market every year, as their results often hit the market between four to eight weeks after the end of the financial year. The reason is not far-fetched: Such companies do not present their financials to a primary regulator for approval before being released to the market, unlike banks and their insurance cousins particularly whose financials go through the CBN or National Insurance Commission (NAICOM). Over the last three financial years, most insurance companies have had to grapple with challenges posed by the new international accounting standards, which the banks had to contend with long before now.
Summarily, note the period to expect the audited result with the release of the third quarter results and position right.
Please note also that quarterly results alone will not determine equity prices even in the very short-term. As a result, learn to keep tab on the prevailing market situation to measure the probable impact of full year earnings performances on stock prices.
In other words, positive earnings in a bullish market will most probably lead to further rally, while positive earning in a down market may not impact much. Negative earning in an uptrend won’t move price up in as much as the decline is not sharp.
The current 10% price circuit will boost returns faster as the market reacts to earnings reports, leading to early equilibrium price level in response to earnings surprises.
The implication of this is that positive results may not experience a bull-run for more than a week after which profit takers would besiege the market to slow down price activities. It is the same for negative earning.
The best every investor must learn to do at this point is: Be technical-analysis compliant for the best of short-term market play, while anticipating quarterly and full-year audited reports that will commence in January 2018.
Investors who may not be desirous of technical analysis skill could be shooting themselves in the foot, because they might be buying at the end of an initial rally in response to positive earnings as profit takers dump stocks, while traders re-enter when audited report are near for equities projected to likely pay final dividends by effectively combing fundamental and technical analysis. Earnings release date and expected market reaction is important when trading earnings season.
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