How To Invest During Earnings Season?

Anticipation is thick in the air as the earnings season draws upon us. All eyes are on the upcoming earnings announcements by tech giants. The S&P 500, for instance, has been defying odds with its bullish run time and again. Will it hit a new high if the aforesaid companies announce better than expected results? Is it a good time to invest?

Generally, there are a few options:

1. Lock in profits by selling either partially or fully before earnings season

This can be prudent if the unrealised profit is not very big as it can quickly turn into a loss if the stock price reverses direction. If the profit cushion is large, some investors will sell partially and keep the rest in hopes of further upside.

Sometimes, a drop in share price because earnings missed forecasts slightly can be an opportune time to buy into a good company at a discount if the company’s fundamentals remain strong and the prospects remain bright.

The effect of quarterly earnings report is not always predictable or easily understood. Although share prices are expected to pop when earnings exceed expectations and vice versa, sometimes it can be the opposite and the reasons may not always be clear. $Apple(AAPL.US)$ recently announced great results but forecasted growth to slow down. This caused some amount of selling down. $Microsoft(MSFT.US)$ beat analysts’ expectations but there was still some drop in stock price as without the effect of currency fluctuation, the growth rate for its cloud computing revenue was lower at 45% . $Tesla(TSLA.US)$ reported that quarterly profit exceeded USD1 billion. The stock price shot up but a day after, it plummeted due to investors’ fears over Chinese regulatory actions towards the private education sector.

2. Buy after earnings are announced

This minimises the chances of guessing wrongly. The idea is to jump in when the share price is on the way up. The flip side is if the share price gaps up very quickly, it is possible to enter at too high a price and if the stock loses steam after that, it is important to cut loss decisively (set a stop loss).

3. Continue as usual

Long-term investors may continue investing a fixed amount at fixed intervals (dollar cost averaging) into companies they have a strong conviction in. If the balance sheet looks healthy and there are no adverse changes in the business environment, the fluctuations due to earnings seasons may be considered small blips in the large scheme of things. Non-DCA investors buy and sell when their target price is reached.