Magnificent Earnings Week: What was your fave?

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Coach Donnie joined discussion · Oct 31, 2024 12:55

HOW TO ANALYZE 🧐 EARNINGS 📁 REPORTS 📑📄🗃

Investing in stocks is investing in a portion of a publicly traded company.

If the company continues to grow, the value of the stock will increase. If the company doesn't operate well, the value of the stock will decrease.

So how do we know if a company is doing well or not?

The answer lies in the earnings report.
An earnings report is a filing made by public companies to report their performance over a specific period. It offers a detailed picture of a company's financial health and operating results.

Generally speaking, public companies will release earnings reports every quarter. The ones released after the first three fiscal quarters are called quarterly reports, also known as Form 10-Q. The ones released after the four fiscal quarters are called annual reports, known as Form 10-K. The 10-K provides a yearly update of the company's business and includes more detailed information than the 10-Q.

For investors, It is important to learn how to read earnings reports.

On the one hand, the earnings report is like the company's medical examination form. By reading this form, investors could gauge the company's financial health and make smarter investment decisions.

On the other hand, the earnings reports will have a huge impact on the company's stock price.

For example, if a company's earnings report is better than market expectations, it may push the stock price higher; If the earnings report falls short of the market expectations, the stock price is likely to fall.

However, there is a lot of content in the annual report, including the company's business, risk factors, and financial statements.

How to read it?

We have summarized four steps to help you read the earnings report.

The first step is to understand the business model, determining its main products and services, what subsidiaries it owns, and what markets it operates in.

The second step is to take a look at the company's profitability. By analyzing the income statement, you can see if the company is profitable and how profitable it is.

The third step is to analyze the solvency of the company deeply. Analyze the balance sheet to see if the company is at risk of bankruptcy.

The fourth step is to analyze the company's cash flow to see whether the company has enough cash for future growth or distribution to shareholders.

Through the above four steps, investors could gain more insights into whether the company is performing well and how well the company runs.

What is an earnings report?

An earnings report is a document that all publicly-traded companies are legally required to produce every quarter. The report outlines the financials of a company, so it’s an opportunity for the business to share its current outlook with investors and the general public.

Earnings reports are released around the same time, in what is known as earnings season. During peak earnings season, over 100 companies can report every single day. Earnings season is a couple of weeks after the close of a quarter.

Usually, this is:
• April, for the quarter ending in March
• July, for the quarter ending in June
• October, for the quarter ending in September
• January, for the quarter ending in December

It’s worth noting that while most companies divide the year up into these quarters, not all do.

Learn more about earnings season.

• Where can you find earnings reports?
Earnings report filings will go straight to the exchange regulators, such as the US Securities Exchange Commission (SEC), who publish company earnings to investors. But you can also usually find earnings reports on each company’s investor information hub.

• What to look at in an earnings report
Earnings reports can be hundreds of pages long, but for the most part, there are only a few metrics that investors will look at to make their judgements.

These include:
• Revenue or sales
• Expenses
• Net income
• Earnings per share
Mostly, traders and investors will focus on these financials, but it’s always important to be aware of the other factors that have influenced its performance. The other information that will be covered in an earnings report will look at any ongoing legal issues and potential risks to the company. It also includes the management’s view of the financial quarter and its future outlook.

Company revenues

A company’s revenue – also known as sales or top line – is the amount of money it’s made through sales during the quarter. Revenue isn’t necessarily an indicator of the firm’s overall success, but it can paint a picture of how consumers interact with the company.
When looking at revenues, you should be assessing whether the company’s sales have increased or decreased from the same quarter the previous year, and the previous quarter that year.
The differences between quarters can help you ascertain whether sales have increased or decreased, whether the cost of sales (logistics, marketing, rent, people, etc) is cheaper or more expensive, or whether market risks have impacted sales.
Mostly, investors will focus on revenues first to understand the company’s health – particularly if the company, sector, or economy is in a period of decline. As if sales are continuing, but other market risks are impacting the rest of a company’s financials, it can be a sign they’ll bounce back.

Operating expenses

A company’s expenses are the money they’ve spent during the quarter on operations. This includes costs that are involved in the complete end-to-end of the product or service, such as research and development (R&D), marketing, and general head costs of running the business.

While expenses will detract from a final profit, some outgoings are viewed as a positive by markets. For example, larger investments into R&D can indicate an upcoming new technology, and a large hiring push in new geographic locations can be a sign of future expansion.

Net profits

A company’s profits – also known as its bottom line or net income – is the amount of money the firm has left after it’s subtracted all of its expenses from its revenue. This is the most important metric as it’s the money a company makes and will have for future operations or to distribute to shareholders.

A company that reports profits every quarter will usually see demand for its stock, particularly if this translates into dividends. However, a net loss isn’t always a turn-off for investors either. Some companies can take years to turn a profit but will appeal to investors based on the earnings potential.
Often when the expenses are more than the revenues, the company has made up the difference through loans. A huge pile of debt can lead investors to be more cautious about buying the company’s stock.

Earnings per share

The earnings per share (EPS) metric is a measure of how much profit a company has generated allocated to each outstanding share of its common stock. This is probably the most talked-about metric, one you’ll see all over post-earnings press and analysis.
It’s calculated by subtracting the difference between a company’s net income and dividends, divided by the number of shares a company has on the market.

If a company has a high earnings per share, it’s usually an indication that it has money available to reinvest or distribute to shareholders.

Tips for reading earnings reports
1. Read third-party analysis and estimates
Both before and after an earnings report, you should take a look at third-party analysis from financial professionals.

In the run-up to an announcement, analysts will start releasing their earnings estimates – particularly for EPS. While these can indicate what to expect, they’re more important after the report is public.

Interpreting earnings reports aren’t an exact science, as a lot of the subsequent share price movements depend on how the market perceives the financials, rather than the financials themselves.

You’ll often hear talk about a company’s earnings ‘beating estimates’ or ‘missing estimates’, and this disparity between predictions and actual figures can have a big impact on share prices.

If the estimates are close to or spot-on for the actual financials, markets will likely not move that much after the event, as there is no new information to factor into the share price. However, if the real figures are above or below estimations, there’s often volatility as investors and traders rush in to adjust their positions.

Get the latest news and analysis from our in-house experts.

2. Compare financial trends and company guidance

One of the most important things to notice when you’re reading an earnings report is the trends each number is showing you. Is the company’s revenue increasing or decreasing? Is the bottom-line rising each year?
When you combine any trends with the company guidance and analysis that the management team gives, you should be able to judge whether or not the company is confident in its future.

Company guidance is released alongside earnings reports, although it’s not a legal requirement. It gives investors an idea of what could happen in the next quarter and year ahead.

Company guidance does have a big impact on shares, as it’s the most forward-looking part of the report. If the guidance is lower than expected, it will cause the share price to drop, and higher guidance can boost the share price.

3. Read the press release

An earnings report can be well over a hundred pages, so a lot of share traders will look to find the headline facts they’re interested in. As the reports are so long, it can be easy for companies to gloss over certain details or hide data amongst a lot of wordy explanations.

One way of finding the highlights is by looking at the press release that accompanies the report and gives an overview of the essential numbers and bottom-line information. However, it’s important to note that these come from the companies themselves. So, in much the same way as the earnings report, they can have a positive spin.

A lot of traders will look straight to the tables of data, skipping over all the company’s interpretations of its performance. This way, the information is fairly black and white.

4. Take the CEO with a pinch of salt
A CEO is a salesperson. They’re there to make the company look good and boost investor confidence, even when there is something worth worrying about.

Listening to the earnings call and reading the comments from the CEO are vital to understanding what the company thinks about its future, but you should always compare this to the numbers to see if everything tallies up.

You want the financials and company outlook to compliment each other. If there are troubling numbers, the CEO should acknowledge this and provide a solution to investors to ease concerns.
If a CEO or management’s statement is exceptionally positive, and the figures don’t align, it can be a red flag.

How to trade top stocks

You can speculate whether share prices will rise or fall during earnings season:
1 Open a Brokerage account, or log in if you’re already a customer
2 Search for the company you want to trade
3 Choose your position and size, and your stop and limit levels
4 Place the trade

How much risk can you take⁉️

When it comes to investing, risk and return may come hand-in-hand. If unwilling to take risks, one should not expect returns.

However, it could be dangerous when some only have their eye on the returns and neglect the risks.

So, how to balance risk and return? This depends on how much risk you can take.

Risk tolerance varies from person to person. This is mainly related to 4 factors.

The first factor is age.

A young man in his prime and a retired senior generally have different levels of risk tolerance.

Young people usually have a longer timeline to recover from their losses.
Therefore, they may be more risk-tolerant.

However, many elderly people live off pensions or savings, and may not have other sources of income, which can make them relatively less risk-tolerant.

A commonly cited rule of thumb makes it easier to approach the relationship between age and high-risk assets, such as stocks.

According to this principle, the percentage of stocks people may consider holding is equal to 100 minus their age.

For example, a 30-year-old investor may consider allocating 70% of their idle funds to stocks, while according to this rule, that percentage for an investor aged 70 should be within 30%.

However, this formula can be flexible. You can adjust it according to your situation. But, all else being equal, the principle is the older you are, the lower the proportion of your portfolio that you might want to consider investing in high-risk assets.

The second factor is financial status.

For example, if someone is well-off and has no debt and he is also single, then there is a lot less financial burden on his hands. But if he is married with kids, then living expenses are high, and he might struggle to make ends meet. There is an essential difference between his risk tolerance level in these two situations.

The former is in good financial condition. A slight loss will not affect life. Therefore, the risk tolerance is relatively strong.
The latter's financial situation is already unstable. Losing money on an investment might result in a huge burden on life.
Therefore, the risk tolerance is very weak.

The third factor is individual risk appetite.

Everyone has different perspectives on risks.

Some people are conservative even when they are young and well-off.

They simply do not want to take any risks, thus they are not the best candidates for high-risk investments.

Some people are more radical.

Losing money will not rattle their mindsets. Thus they are willing to take high risks to gain possible high returns.

The fourth factor is the level of investment knowledge.

The essence of risk is uncertainty. Before investing, you will not know the profits or losses it brings.

If you have done your homework in asset analysis with the right investment mindset, you may become more capable of controlling the investment risks perceived by others as huge uncertainty.

Conversely, you'll be walking a thin line if you choose to invest in financial assets that you don't know much about, especially those involving high risk.

To sum up, the investment risk that you can take depends on your age, financial situation, risk appetite, and investment knowledge. Before investing, we must know our situation, and not act on impulse.

• Investing is fun and exciting but dangerous if you don't do any work.
• Never invest in a company without understanding its finances.

• Everyone has the brainpower to make money in stocks.

Key 🔑 Takeaways ☝🏽

Rule 1: Investing is fun and exciting but dangerous if you don't do any work.
Rule 2: Your investor's edge is not something you get from Wall Street experts. It's something you already have. You can outperform the experts if you use your edge by investing in companies or industries you already understand.
Rule 3: Over the past three decades, the stock market has come to be dominated by a herd of professional investors. Contrary to popular belief, this makes it easier for the amateur investor. You can beat the market by ignoring the herd.
Rule 4: Behind every stock is a company. Find out what it's doing.
Rule 5: Often, there is no correlation between the success of a company's operations and the success of its stock over a few months or even a few years. In the long term, there is a 100% correlation between the success of the company and the success of its stock. This disparity is the key to making money; it pays to be patient and to own successful companies.

Rule 6: You have to know what you own and why you own it. "This baby is a cinch to go up" doesn't count.
Rule 7: Long shots almost always miss the mark.
Rule 8: Owning stocks is like having children - don't get involved with more than you can handle. The part-time stockpicker probably has time to follow 8-12 companies and to buy and sell shares as conditions warrant. There don't have to be more than five companies in the portfolio at any time.
Rule 9: If you can't find any companies that you think are attractive, put your money in the bank until you discover some.
Rule 10: Never invest in a company without understanding its finances. The biggest losses in stocks come from companies with poor balance sheets. Always look at the balance sheet to see if a company is solvent before you risk your money on it.

Rule 11: Avoid hot stocks in hot industries. Great companies in cold, non-growth industries are consistently big winners.
Rule 12: With small companies, you are better off waiting until they turn a profit before you invest.
Rule 13: If you are thinking of investing in a troubled industry, buy the companies with staying power. Also, wait for the industry to show signs of revival. Buggy whips and radio tubes were troubled industries that never came back.
Rule 14: If you invest $1000 in a stock, all you can lose is $1000, but you stand to gain $10,000 or even $50,000 over time if you are patient. The average person can concentrate on a few good companies, while the fund manager is forced to diversify. By owning too many stocks, you lose this advantage of concentration. It only takes a handful of big winners to make a lifetime of investing worthwhile.
Rule 15: In every industry and every region of the country, the observant amateur can find great growth companies long before the professionals have discovered them.

Rule 16: A stock market decline is as routine as a January blizzard in Colorado. If you are prepared, it can't hurt you. A decline is a great opportunity to pick up the bargains left behind by investors who are fleeing the storm in panic.
Rule 17: Everyone has the brainpower to make money in stocks. Not everyone has the stomach. If you are susceptible to selling everything in a panic, you ought to avoid stocks and stock mutual funds altogether.
Rule 18: There is always something to worry about. Avoid weekend thinking and ignore the latest dire predictions of the newscasters. Sell a stock because the company's fundamentals deteriorate, not because the sky is falling.
Rule 19: Nobody can predict interest rates, the future direction of the economy, or the stock market. Dismiss all such forecasts and concentrate on what's actually happening to the companies in which you have invested.
Rule 20: If you study 10 companies, you will find 1 for which the story is better than expected. If you study 50, you'll find 5. There are always pleasant surprises to be found in the stock market -- companies whose achievements are being overlooked on Wall Street.

Rule 21: If you don't study any companies, you have the same success buying stocks as you do in a poker game if you bet without looking at your cards.
Rule 22: Time is on your side when you own shares of superior companies. You can afford to be patient - even if you missed Wal-Mart in the first five years, it was a great stock to own in the next five years. Time is against you when you own options.
Rule 23: If you have the stomach for stocks but neither the time nor the inclination to do the homework, invest in equity mutual funds. Here, it's a good idea to diversify. You should own a few different kinds of funds, with managers who pursue different styles of investing: growth, value small companies, large companies, etc. Investing in six of the same kind of fund is not diversification.
Rule 24: Among the major stock markets of the world, the US market ranks 8th in total return over the past decade. You can take advantage of the faster-growing economies by investing some portion of your assets in an overseas fund with a good record.
Rule 25: In the long run, a portfolio of well-chosen stocks and equity mutual funds will always outperform a portfolio of bonds or a money-market account. In the long run, a portfolio of poorly chosen stocks won't outperform the money left under the mattress.

• Peter Lynch, born January 19, 1944, is a distinguished stock investor and fund manager.
He was vice-chairman of Fidelity, the world's largest investment fund company, and a member of the board of directors of Fidelity Fund Custodian.

• For the 13 years that Peter Lynch was a portfolio manager (1977–1990), he earned a reputation as a top performer, increasing assets under management from $18 million to $14 billion (as of 1990).

• Peter Lynch explains how he conducts his analysis in his two books, One Up on Wall Street and Beating the Street.

• If you read these two books carefully, you can find that Peter Lynch's method is straightforward, and most beginner investors can follow his lead in investing.

• Peter Lynch's "invest in what you know" strategy has made him a household name among investors, large and small.

Above ☝🏽 are 25 Golden Rules for investing summarized in Peter Lynch's book.

#CoachDonnie

TRADERS:

ORDER BOOK MANIPULATION

The order book is a critical tool for traders it shows the buy and sell orders for a stock and provides insight into supply, demand, and price action. But what happens when the order book is manipulated? Manipulators can use order book manipulation to deceive traders and control price movements, leaving unsuspecting retail traders at a disadvantage.

What Is Order Book Manipulation?

Order book manipulation is when traders or institutions place fake or deceptive orders to create a false impression of supply or demand. This can influence how retail traders view the stock and trick them into making poor decisions. These manipulative tactics don’t represent real buying or selling intent—they’re purely designed to mislead.

Common Order Book Manipulation Techniques

1. Spoofing
What it is: Placing large fake buy or sell orders to make it appear as if there is strong demand or supply at a specific price.

How it works: A manipulator places a large buy order below the current price or a large sell order above it. This creates the illusion that the price will move in a specific direction, influencing retail traders to follow suit. Once traders act, the manipulator cancels their fake orders.

Result: Retail traders buy or sell based on the fake momentum, allowing manipulators to execute their real trades at better prices.

2. Layering

What it is: Placing multiple orders at different price levels to create an artificial sense of market depth.

How it works: Manipulators stack the order book with fake orders at incremental price levels. For example, they may place several sell orders just above the current price to create the illusion of strong resistance. Retail traders, seeing the apparent supply, might sell or short, and the manipulator cancels their orders and buys at a lower price.

Result: Retail traders react to fake resistance or support levels, and the manipulator profits from the resulting price movement.

3. Iceberg Orders

What it is: Breaking up a large order into smaller, hidden portions to avoid showing true buying or selling interest.

How it works: A manipulator uses iceberg orders to disguise their large positions. For instance, they may break up a massive buy order into small pieces that only show incrementally on the order book. This can fool traders into thinking there’s little demand or supply until the price suddenly moves.

Result: Retail traders are caught off guard by the sudden price action caused by hidden orders.

4. Wash Trading

What it is: Simultaneously buying and selling the same stock to create the illusion of activity or momentum.

How it works: Manipulators execute trades between accounts they control. This inflates volume and creates the impression that the stock is in demand.

Result: Retail traders jump in, thinking the stock is active, but the volume is fake and unsustainable.

How Order Book Manipulation Impacts You

Manipulators use these tactics to:
Influence the price direction without real trades.
Trap retail traders into poor entries or exits.

Create fake support or resistance levels to control sentiment.

For example, you might see a huge buy wall (large order) appear in the order book, making you think the price won’t fall further. But just as you buy, the buy wall disappears, and the price tanks.

How to Protect Yourself

1. Don’t Trust the Surface:

Understand that not all orders in the book are genuine. Look for patterns of orders appearing and disappearing quickly.

2. Focus on Price Action:

The actual trades happening (not just the orders in the book) tell a more reliable story.

3. Be Cautious with Large Orders:

Huge orders at key levels can often be bait. Wait to see if they’re real before making a move.

4. Avoid Emotional Reactions:

Manipulators rely on emotional responses to fake signals. Stay calm and trade with a plan.
Order book manipulation is a sophisticated tactic used to deceive and exploit retail traders.

By understanding these techniques and staying cautious, you can avoid falling for the traps set by manipulators. Remember, the order book is just one toolit’s not always as honest as it seems.

Examples of where this type of manipulation may have taken place:

$Faraday Future Intelligent Electric Inc. (FFIE.US)$

$Primega Group (PGHL.US)$

$FOXO Technologies (FOXO.US)$