Postcards: Seventy Miles of Dirt (A Primer for Earnings Season)

If you've been reading Postcards, you know that central banks, liquidity, and momentum are the big drivers of equity markets. But every three months, we get together and keep media outlets in business                                                                                                                                                                                                                                                                                                                                                                                                                 Forwarded this email? [Subscribe here]() for more You are a free subscriber to Postcards from the Florida Republic. To upgrade to paid and receive the daily Republic Risk Letter, [subscribe here](. --------------------------------------------------------------- [Postcards: Seventy Miles of Dirt (A Primer for Earnings Season)]( If you've been reading Postcards, you know that central banks, liquidity, and momentum are the big drivers of equity markets. But every three months, we get together and keep media outlets in business [Garrett {NAME}]( Jan 10   [READ IN APP](   Market Update: I am not well. Whatever stomach bug my wife and daughter had has officially defeated me. As I said yesterday, I’m glad that it hit today and not tomorrow. Markets are in a low-volume environment, insider buying is hushed, central bankers are quiet, and earnings season starts on Friday. With the energy sector negative, we’re watching names like Occidental (OXY) slide, setting us up for an opportunity in the next week or so to deploy the Warren Buffett trade… Dear Fellow Expat: “AMELIA!!!” I scream, shaking my fist to the sky. On Monday, she had the stomach flu. On Tuesday, my wife had the stomach flu… You know how the story ends on Wednesday. Dall-E It’s been quite a month. Amelia got Fifth’s Disease in school last month, and her class is now finally plowing through that. Every day with a kid is like Forrest Gump’s box of chocolates. Except the chocolates are vile illnesses… “You never know what you’re going to get.” Dall-E As I said, I’m glad it was today… and not tomorrow with the Consumer Price Index on tap. More importantly, I need to be focused on Friday as earnings season starts. I’m going to take a step back today. Today, we will explore what earnings season is and why it matters. [Upgrade to paid]( The Fed, and Then 70 Miles of Dirt I follow liquidity in the market. Money moves stocks — debt and deflation threaten the system. The Federal Reserve acts as a lubricant to keep the financial engine moving.  The actions of all central banks — as evidenced by the last two years of hyper-fascination — drive the equity markets. There is central bank activity… plus the other sources of capital and liquidity. Then… there are 70 miles of dirt… nothing comes close to the central banks. But right under that dirt pile… is earnings season. You’ve likely heard the term "earnings season" thrown around. But what exactly is it? And why are we so obsessed with it every three months? Yes, it’s essential. But it always feels like the purpose of this is more tied to keeping CNBC’s and other financial media journalists employed. After all, how can we have this many zombie stocks - with no profits and massive price-to-sales ratios - still public, and no one seems to care? Investors can’t be such gluttons for punishment, right? In earnings season, publicly traded companies release their financial results for a specific quarter. It happens four times a year, aligning with the calendar quarters — January to March (Q1), April to June (Q2), July to September (Q3), and October to December (Q4). Due to 1930s regulations, public companies are legally required by the U.S. government to report their financial performance to shareholders and authorities. There are five essential elements of an earnings report and related calendar. They are designed to do these things so investors can decide if they want to keep their money in the organization. Issue 1: Company Performance Earnings season allows investors and analysts to review a company's financial health and performance. By analyzing the income statement, balance sheet, and cash flow statement, shareholders can gain insights into a company's revenue, expenses, profitability, debt levels, and overall growth trajectory.  Here at Republic Research, we’re looking for [positive changes in the Piotroski F score](. We want to find companies that are improving overall. We want higher returns on assets, lower debt, more stock buybacks, and more. Owning stock in a business is to get a share of the profits. These performance metrics are essential and laid out in corporate filings and the conference calls attended by executives. Issue 2: Market Expectations You’ve heard of market analysts. These are the people who cover a public company and provide written insight into expectations for the future.  These analysts often predict how a company will perform during a specific quarter. Spoiler alert - there aren’t many great analysts. But if you’re looking for the best of the best, [check out TipRanks]( which tracks analyst performance and how well the stock aligns with their price forecasts. It’s a pretty great tool. These analysts set profit and revenue expectations, and the combination of all analysts’ projections is called the “consensus” figures.  These expectations are based on analysts' forecasts, previous financial results, and economic conditions. Earnings season reveals whether a company has met, exceeded, or fallen short of these Wall Street expectations. Any surprise to the earnings figures can fuel significant price movements in the company's stock. Issue 3: Macro Industry and Economy Outlook Beyond individual company performance, earnings season offers valuable insights into broader economic and industry trends. Analysts can identify patterns and trends that may impact investment decisions and economic outlooks by analyzing the collective results of multiple companies within a sector or industry. On Friday, we’ll have several reports from large Wall Street banks. We’ll get updates from JPMorgan Chase (JPM), Bank of America (BAC), and others. Next week, we’ll have updates from regional banks like PNC Financial (PNC) and M&T Bank (MTB). These reports will give us important information on the state of the economy and the state of the consumer. We’ll find out about default rates. We’ll find out about delinquencies. We’ll better understand how much money depositors are pulling out of banks and putting into money markets. From a collective standpoint, we can assess the financial sector's health and gather more information about the U.S. economy in 2024. These reports will set the tone for the year. Issue 4: Forward Guidance Alongside their financial results, companies typically provide guidance or forecasts for future quarters. This guidance can influence investor sentiment and expectations for the company's growth potential, making it an essential component of earnings season. This is the under-appreciated part of earnings season. Consider a situation where a company reports earnings. They crush earnings expectations, they report huge revenue numbers. They blow the analysts’ figures out of the water. But the stock falls… why? Well, in addition to some investors taking profits off the table… you must consider the forward guidance of the company. What are they predicting this year regarding profits, deliveries, revenue, and more? If they see weakness in their business or industry, that will negatively impact the company. On the other side, they might miss earnings, but predict a HUGE year for their business. This sort of glowing expectation can lead to a big jump in the stock. Forward guidance is typically covered in detail during the company’s conference calls. Issue 5: Compliance This is the one that most people forget, especially in the wake of the Sarbanes Oxley Act of 2002.  Companies are required by law to release their quarterly earnings reports. This regulatory aspect ensures transparency and accountability, helping to maintain trust in financial markets.  After Enron and WorldCom’s massive deception at the turn of the century, companies must provide proper accounting. What’s very interesting about this compliance, however, is that private companies don’t need to do this.  Since Sarbanes Oxley, the number of public U.S. companies has declined by roughly 50%, as compliance costs are a disincentive. Also, please pay close attention to the new SEC rules that require companies to track their carbon output. This could be a massive deterrent to companies going public in the years ahead. Back to Bed! All right… you’re all set for earnings season. Tomorrow, we’ll start looking at companies and assessing opportunities ahead. Remember, it’s very dangerous to buy options ahead of earnings reports. But even selling options can be a bit tricky as well. If you are going to sell anything, sell calls on existing positions to generate income. The worst-case scenario is that the stock rises, you need to sell it but lock in gains. Stay positive, Garrett {NAME} Disclaimer Nothing in this email should be considered personalized financial advice. While we may answer your general customer questions, we are not licensed under securities laws to guide your investment situation. Do not consider any communication between you and Florida Republic employees as financial advice. Under company rules, editors and writers cannot recommend their positions. The communication in this letter is for information and educational purposes unless otherwise strictly worded as a recommendation. Model portfolios are tracked to showcase a variety of academic, fundamental, and technical tools, and insight is provided to help readers gain knowledge and experience. Readers should not trade if they cannot handle a loss and should not trade more than they can afford to lose. There are large amounts of risk in the equity markets. Consider consulting with a professional before making decisions with your money.   [Like]( [Comment]( [Restack](   © 2024 Garrett {NAME} 548 Market Street PMB 72296, San Francisco, CA 94104 [Unsubscribe]() [Get the app]( writing]()