Stern Advice: Earnings season shortcuts

WASHINGTON, April 25 Wed Apr 25, 2012 2:06pm EDT

WASHINGTON, April 25 (Reuters) - Every day for the next several weeks, dozens of publicly held companies will release their quarterly reports. Welcome to earnings season.

Sigh. So many companies, so little desire to slog through all those financial statements.

But slog you must, if you are a person who invests in individual companies. "People buy individual stocks because they want greater control over their portfolio," says Charles Rotblut of the American Association of Individual Investors. "But if you want that control, then the tradeoff is, you have to put in extra time to read those reports."

Of course, journalists at Reuters and elsewhere read so you don't have to. Many news articles about earnings reports cut to the chase with the important information up high, so you can skim the story to get the gist of it.

Here are some other earnings season shortcuts that can help you extract the most important information without giving up your entire spring season to do it.

-- Read, don't trade. Unless you are a cyborg, you're not going to beat the computer traders who move stocks (often after the markets are closed) immediately upon release of the earnings reports. "You will never be fast enough to profit from trading on these reports," says David Hultstrom, a Woodstock, Georgia, financial adviser.

Companies' share prices already reflect what the market players expect to see in the report, he says. If earnings do better than expected, traders will immediately reprice the stock higher. If they do worse, the price will immediately go down.

-- A miss is more significant than a beat. Companies do try to ready investors for their earnings reports by telegraphing their expectations to analysts. But it's also common for companies and analysts to lowball, so everyone can be pleasantly surprised when results are better than expected. So far this season (during which results are being reported for the first quarter of 2012), 77 percent of companies reported earnings that beat expectations, according to figures compiled through April 24 by Thomson Reuters.

A company that beats expectations, then, is sort of like an above-average kid at Lake Wobegon: average.

On the other hand, when a company misses expected earnings, that can signify a bigger problem.

-- Ask why. Not every 'miss' means the company is in trouble. For example, Rotblut says he expects most of the utilities to report underwhelming earnings for the first quarter because the winter was exceptionally mild. Does that mean you should give up on a company? Probably not. Sometimes sales will slow because a company is about to push out a new product line and has stopped shipping or marketing their old products. That can be a good sign, not a bad one.

-- Look at costs. Is your company paying a lot more for the materials it needs to do its business? If so, does it have enough of a leading position in the market to pass those costs through to customers? If not, you may see a squeezing of the profit margins. That's usually not good. But in some commodity-dependent companies, like energy companies, it may be normal operating procedure.

-- Dig deep when there are special write-offs. Sometimes, companies will stick all their troubles into one quarterly report, so it looks like they have big losses. And instant traders will buy the stock and prop up the price, because they think the company looks fundamentally good and the house-cleaning is a good thing. But jumping to either conclusion is wrong: A company concentrating long-term losses into one quarter may be done with them, or not. And the real question shareholders should ask is: Why did they have those losses in the first place?

-- Know your industry. Each one has its own jargon and its own bogeys. For retailers, it is same store sales. For hotels, it is "RevPAR" - revenue per available room. Airlines have load factors, and railroads have car volumes. If you don't understand the jargon in a report you're reviewing, Rotblut has a simple answer: Go to Google, and learn it.

-- Compare apples to apples. Don't just read the report of the company you own. Check its key metrics - earnings growth, price-earnings ratio, profit margins - against the same data for its key competitors. And when you are looking at sales and profit figures, don't compare one quarter to the last, because for many industries the patterns are seasonal. Instead, compare sales and profits to those reported during the same quarter a year earlier.

-- Think long term.Read more of her work atEditing by Gunna Dickson)