Winners and Losers of the Second Quarter — By Bill Poulos
Poulos is a contributor on Investing.com and Medium. Bill Poulos recently wrote, “5 Next Best ICO Opportunities To Look Out For”. Poulos often offers his expertise through online contributions, books, and training materials. He is President of Profits Run, Inc. He cofounded the company with his son Greg Poulos. Poulos was born in Detroit, Michigan. He is married with three sons. He currently resides in Michigan. Here Bill Poulos offers insight into situations at the end of a quarter that can affect stock price.
The second quarter has come to an end which means that it’s time for companies to report their quarterly earnings. As always there will be winners and losers but this quarter has seen some changes that could have a big impact on future quarterly earnings. The recently announced tariffs that will be levied by the US government are going into effect and will undoubtedly indirectly affect the bottom line of some US corporations due to the retaliation in kind by our trading partners. Allot of our trading partners have already announced tariffs that will be levied on US goods that are imported into their countries which hopefully will not lead to an all out trade war.
There may be an initial shock to the earnings of the affected companies but most of them will eventually absorb the added cost in some way either by passing part of it or all of it along to consumers or by moving the production of their products abroad to avoid paying the tariffs altogether. Future earnings will largely depend upon how well each affected company is able to handle or counteract any tariffs that are imposed on it by foreign governments.
Investors and traders often times are very leery about buying the stock of a company shortly before an earnings announcement comes out and they may also consider selling a position before the event takes place, this is because the announcement can have a sudden and dramatic effect on the value of the stock. The interesting thing about this is that it isn’t always the announcement itself or what the information that is contained within the announcement states that make the stock move.
A few weeks before the scheduled earnings announcement comes out by a given company analysts will try to estimate what the earnings reports will state, basically this is a prediction or a guess based upon the information that they have at the time. When the earnings prediction is published the price of the stock can react to the prediction baking the effect of the prediction into the price of the stock. This is the Efficient Markets Theory at work which states that all investors have access to all of the same information at the same time which is arguably true now more that ever due to the speed of modern communication. The prediction can cause sudden moves in the price of a stock as the market reacts to the information.
A few weeks after the prediction is published the actual earnings announcement is made by the company which is when we commonly see sudden and often times big moves in the stock price. These moves are a function of how close the analyst’s predictions are to the actual report information that is published. If their guesses were very close to the actual numbers there will likely be very little discernible movement, if any at all, but if their guesses were very far off from the actual results we can see big and dramatic moves which can result in big gaps in the price of the given stock either up or down. These moves are actually corrections that the market is making to the current price of the stock to reflect the actual earnings information that was just published so basically the moves are predicated on how wrong the analysts’ predictions are.
A safe and conservative thing to do would be to avoid earnings reports as much as possible though it will be almost impossible to avoid them altogether. Another possibility is to embrace the volatility and the fact that analysts are wrong a large percentage of the time so there will be a given amount of predictable volatility around earnings announcements. When they are scheduled there are several stock trading and options trading strategies that can be employed to take advantage of them. Often times the sudden moves are very short term in nature with the price action returning to where it was before the announcement but it is also possible that an earnings report can send the price of the stock in a given direction for an extended period of time. We can take advantage of any move that a stock makes as long as we are knowledgeable and prepared in advance to do so.