The Smart Investor's Guide to Profiting from Earnings Season

Stock Watch

The Smart Investor's Guide to Profiting from Earnings Season

Closely studying important earnings reports can help you gauge where the market’s heading and what stocks present buying opportunities.

Here they come: Corporate America has begun to release a fresh batch of earnings reports that measure the results of publicly traded companies in the final quarter of 2010. This barrage of numbers and the accompanying company comments and analysts’ reactions will influence stock-market action well into March.

Third-quarter reports were terrific, helping to fuel an impressive rally that has carried over into early January. From August 31, when investors clearly began to anticipate better times ahead, through January 14, Standard & Poor’s 500-stock index jumped 24.1%.


As share prices rise, investor sentiment is turning more bullish -- maybe a little too positive for the sake of the continued health of the current rally (see our interview with Liz Ann Sonders and why she’s worried about the high levels of optimism about the stock market). But, barring some unexpected shock, such as a major terrorist attack or a surge in food and fuel prices, a stream of healthy fourth-quarter earnings reports are likely to keep the bulls in command of the trading levers until at least the first pitch of Major League Baseball’s regular season.


Analysts on average expect fourth-quarter operating earnings for companies in the S&P 500 to jump 32% from the same period in 2009 (operating earnings exclude one-time events, such as asset sales and write-offs). That’s less than the 37% year-over-year gain for the third quarter of 2010, but it’s still impressive.

Enjoy it while it lasts. Starting with the first quarter of 2011, comparisons with earnings a year earlier will get much tougher. A downshift in earnings-growth rates won’t necessarily mean the end of the bull market that began in March 2009, but it does suggest more sideways action and sharper selloffs than we’ve seen lately.

Earnings season produces so much news that nobody can follow it all. To help you (and us) to focus, the accompanying slide show features 12 companies whose earnings results and outlooks are essential guides to the investment climate -- see SLIDE SHOW: 12 Earnings Reports That Always Matter.

As it turned out, 11 of the 12 companies exceeded the average of analysts’ estimates for the last quarter of 2010 (see A Constructive Earnings Season). The one that missed, Disney, did so only by a penny per share and the reason was flat attendance at Disney World; ESPN and Disney’s movies did fine. I confess I visited Disney World on a cold night in early January and it looked pretty busy to me, so here’s hoping that the stock’s 26% advance between July 1 and January 14 isn’t just the product of some Disney Imagineering.