As a company’s share price is largely a measure of market expectations, the results of an earnings report could drastically change the sentiment around a company. Reporting seasons are often marked by high levels of volatility and investor activity as some companies over-perform while others under-perform. These fluctuations provide opportunities and risks for traders and investors, but it is important to know how to use the information in earnings reports in order to capitalise on any movements.
As always, it’s important to do your research. In the lead up to reporting season, make sure to get your hands on some analyst reports on companies you are interested in.
These should include not only the thoughts of the individual analyst but also information around the “consensus” expectations of those at other firms. Armed with this information, you may decide that company x is undervalued or overvalued and decide to take a position in the lead up to the reporting date. Alternatively, you may decide to wait for the company’s results to be released and place a position after seeing whether it fell short of expectations or beat them.
Also, be aware of a market trend known as “buy the rumour, sell the fact,” which is when a company’s share price rises in anticipation of a strong result (or falls in anticipation of a weak one), then falls on the day the result is released as traders lock in profits. This can be a rewarding strategy (though not without risks) but also creates a potential buying opportunity on the day of the release.