WELCOME TO EARNINGS SEASON Oh, earnings season. This busy, super volatile time that pops up on our calendars every 3 months, consuming the consciousness of market participants. 10 years ago when scheduling my wedding date, my wife wanted to get married in mid-April.
“That won’t work. Earnings season” She was dumbfounded, but I explained the calendar of a buy-sider to her, and she got it. 10 years of anniversary trips later (during the end of March lull period), and she was thankful we did! SO, WHY IS EARNINGS SEASON SO INFLUENTIAL?
First, look at the numbers. The 4 days a stock prints quarterly earnings represent 2% of annual trading days. But those days see 20% of a stock’s annual idiosyncratic volatility. Earnings season brings BIG MOVES. Why? The earnings release is when a company reports
Financial data from the prior 3 month period, updates any relevant guidance for future periods, and hosts an earnings call to add management commentary around both. In valuation, i use what i call in class the “core formula” of P/E times EPS. In this framework, it is assumed
That stocks are priced on collective expectations of forward EPS. The earnings release is the discrete event where we discover new information that shifts the collective view on forward EPS. Hence, the outsized volatility.
RELEVANCE OF EARNINGS SEASON So you might be saying, so what? I’m a long-term investor, earnings season doesn’t matter to me. I would disagree, forcefully. I consider 3 primary orientations towards quarterly earnings. THESIS VALIDATION High quality investing generally
Looks like this: Develop a compelling and unique thesis that isn’t currently baked into price, monitor whether the thesis is playing out (defending against thesis creep) and sell the stock once the thesis is widely discounted into the market price. Even if your expected holding
Period is 3 years, those 12 earnings prints are CRITICAL validation points that the financial metrics of the business are evolving in-line with your expected thesis. Humility and an open mind, paired with a disciplined process about assessing these 12 prints relative to your
Thesis are hallmarks of a strong long-term investment process. DEFENSIVE ORIENTATION Even if you aren’t a trader/pod, I hope this thread can shed light on the rigor that many traders who play at the short end of the equity curve apply to earnings. Pods live print to print.
If you are a 9-18 month player looking for +30-50% returns, focused mostly on structural theses (biz model change, margin stories, new mgmt, etc), earnings still very much matter. In this mature hedge fund market, those ideas tend to get heavily owned by similar players, and I’ve
Very much discovered that positioning or common investor risk (CIR) is often overwhelmingly deterministic during earnings season. Translation - hedge fund hotels are often shit on prints. Particularly where you see a print that isn’t likely to change positive opinion / validate
Your thesis, and has potential to negatively surprise, the risk/reward of sizing down that position into that negative expected value (EV) catalyst is generally strong. Stocks don’t know you own them, so a process where you take a 2:1 R/R, cut into a surprise bad print, then buy
It back on the sell-off when it’s giving you a 3:1 R/R, and the negative catalyst is out of the way, can help improve your results over time. OFFENSIVE ORIENTATION This is where the game gets intense. Data centers full of alt data. Intense haranguing of IR and CFOs about
Sequential SG&A ramps. Disciplined set-up work assessing what’s baked into the stock for the print, working to divine the elusive “buy side whisper”. The detail and rigor that pods apply to earnings season is very high. Why? When you manage in a beta-neutral, factor-constrained
World, capturing these idiosyncratic moves is a MUST for good performance. And it’s not just the print itself, but the run-up, the print, and the post-print trade. In my experience, and while it varies a lot, ~50% or more of P&L generation is generated in the T-14 to T+14 window
Around earnings. So unlike a long only (thesis validation) or a tiger (thesis validation plus defensive orientation), earnings tends to be the Super Bowl of offensive P&L generation for pods.
That sets the table. I’ll come back this afternoon and walk you through MY pre-print, print day and post-print earnings season process. Stay tuned!