Earnings: What to Pay Attention to, What to Ignore

tyler

Let’s be clear about one thing. I am not a stock trader. In fact, none of us at “Nightly Business Report” can even own individual corporate securities; it’s the policy of our parent and producer, CNBC. But I do have some thoughts about how traders view all the earnings that have been pouring out these past couple of weeks.

My first thought, if you’re an investor and not really a trader, is to play past all the chatter on whether a company “beat” or missed Wall Street analysts’ estimates. For one thing, I’m skeptical that the analysts really know all that much. Just look back over the past few quarters and see how close they came to nailing the numbers of, say, the big money center banks.

For another, it doesn’t really matter in the long run whether a company beats or misses this or that estimate. What does matter is whether the company’s earnings are growing, after accounting for special write-offs and the like. Is the company growing or not? That is the key, because stock prices are, in the last analysis, really a function of profits.

(Watch: Earnings Report Card)

My second thought is to pay close attention to revenues. Are they growing or not? If a company is expanding sales, that is a real indicator of health. It’s not foolproof. Obviously you can boost sales by selling things at below cost. But savvy CFOs can do lots of nifty things to make the profit numbers dance. There are, in short, lots of cookie jars from which to extract a few extra pennies per share of earnings. That financial sleight of hand is much tougher with sales. Not impossible. But tougher.

Bottom line: Pay attention to the bottom line. Pay more attention to the top line. And look at the analysts estimates as an interesting amusement.

(Read More: Building a Smart, Low-Cost Portfolio)

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