Earning Season

Earning Season

31 October 2018 from Mikael Syding
Performance reports from thousands of interesting companies will be published in a few weeks in October. Many people ask what the following reports mean for the market at large and for their own portfolios: Apple, Alphabet, Amazon, Alibaba, Microsoft, Tencent, Facebook, JP Morgan, Johnson & Johnson, ExxonMobil, Netflix, AMD, Hennes & Mauritz, Nordea, Ericsson and Telia.

Are the reports really important to keep track of, especially in real time? Do you create any value by trying to be quick when you get the information? Is it reasonable at all to believe that you can be faster than high-paid professionals, machines and institutions, with enough quality in your analysis to create excess return?


There is always more information on the financial markets than one can keep track of, and it's coming too far too high, so you have to have a method of filtering out the essential signals from the noise.

To begin with, you need to ask the questions. What can you know? What is valuable to know? What is waste of time?

What is valuable to know? Only what can reasonably affect a company's share price or its underlying actual value, and which is not already included in the course. Everything else is unnecessary noise, unless one believes that knowledge can be useful by facilitating future analyzes.

Clear waste of time is, for example, activities like staring at stock price charts in real time when the reports are published, or updating the return on their equity portfolio. When Tesla sent out its quarterly update, I updated my performance model with the new figures and wondered what it means for my forecasts and my view of the value of the company and the likely stock price trend in the future.

The 25 percent gross margin was extremely much better than the barely 19 percent it was in previous quarters. At the same time, operating expenses fell despite almost doubling car sales from the previous quarter. My interpretation is that the bookkeeping is manipulated and that there is therefore a high risk of disappointment in the next quarter. In that case, it would provide an excellent position to position itself for a falling share price.

Such a fundamental analysis is the basis for the analysis of a company's ability to survive and to create long-term value. It is information you can know quite a bit about and which over time determines your return. In the short term, which unfortunately can be as much as 5-10 years, the perception of success is more important than the facts that support it.

The most difficult thing to handle in the stock market is the interaction between reality and how it is perceived. Not least, how do others interpret information and react to it, as they influence how they think you and other actors think and act. Thus, it is not the business's financial development that is decisive, but the investor's interpretation of other people's thoughts about, of course, the finances, but primarily the price movements.

From this perspective, data on sales, earnings, cash flow, assets and liabilities are almost completely insignificant. And yet, these are the fundamentals that in the long term are the only relevant benchmark for market value. Unfortunately, knowledge of other people's thoughts largely falls within the category "unable to find out and thus waste of time to try". On the other hand, based on analysis of the course movements, you can draw certain conclusions about what others think and maybe will do. However, technical analysis has gained an overriding confidence and is used mostly wrongly and most as a way to fabricate supporting information for a conclusion that has already been decided.

There are, in particular, two reasonable uses for technical analysis. One is to top-trade their own positions, ie. buy a little extra on the decline and sell off a little on the rise, unless there is a clear reason for the movements. The second is to measure the degree of convergence in the market, thus how unilaterally positive or negative investors are measured by industry, sectors, markets, asset classes, etc. The latter analysis can be used to assess whether fundamentals on average will be valued high or low relative to historical averages.

For example, Atlas Copco was traded a month ago at almost 3.5 times sales and today at about 2.5. Over the last few years, the stock looks cheap, but there are a lot of technical signs that stock market valuation ranges are approaching its historical average. In that scenario, 2.5 times the income is rather a roof than a floor, which gives completely different conclusions to an investor. However, we only get enough of this, so the central question becomes "what do others think about this?"

Right now, new company data comes at an unmanageable rate and just why do not worry about it. Instead, create a systematic market analysis model that automatically measures if markets generally appear to change to perhaps move from one balance to another with regard to the perception of values.

Some reasonable factors to consider include interest rate spreads for different types of interest rate instruments and valuation spreads between different sectors and sectors, as well as measurements of shares that note new 52-week stakes or bottoms, or positions in relation to their moving averages. This way, you can measure the market's risk appetite and tendency to trend in one minute.

With such an indicator you are in control of, you can easily find a balance between, for example, Hennes & Mauritz's sales development and its likely market valuation, as well as answer questions as if P / S = 1.3 is considered to be rather a floor or one roof of the rest of the investor agreement.

What you want to accomplish with your information processing and investment is SAR = Stress Adjusted Returns, ie, returns in proportion to your effort and degree of stress. Start by mentally adding everything you can not control in a box that you close, lock and forget. Then you design an efficient system to filter out a convenient signal from an unmanageable noise and use it to determine if there is a systematic change going on.

If it is not, which is usually the case, you can calmly assess the fundamental development of one company at a time, whether it's a reporting period or not, and mainly considering how others are likely to look at the same data.

But, as the last point, you should already have done this. You should already know what you think about the companies you own and those you have on your potential purchase list. If their courses are unreasonable in relation to a single report (remember once a time and twice is a gong-gong), you can swap and bargain or sell off some.

If you seriously think you are long-term and there is no reason to fear the mountains of debt and derivatives that are affected by rising interest rates, you should throw an extra eye on SKF, SSAB and Skanska.

At the moment, however, I think that major changes are underway, and that sales are primarily focused on. But with that I do not necessarily mean that it will happen in October or even the winter 2018-2019, but rather in the 2015-2025 period. In this perspective, it might be more interesting to consider the downside in shares such as H & M, Ericsson and Securitas.

@Mikael Syding

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This information is in the sole responsibility of the guest author and does not necessarily represent the opinion of Bank Vontobel Europe AG or any other company of the Vontobel Group. The further development of the index or a company as well as its share price depends on a large number of company-, group- and sector-specific as well as economic factors. When forming his investment decision, each investor must take into account the risk of price losses. Please note that investing in these products will not generate ongoing income.

The products are not capitalprotected, in the worst case a total loss of the invested capital is possible. In the event of insolvency of the issuer and the guarantor, the investor bears the risk of a total loss of his investment. In any case, investors should note that past performance and / or analysts' opinions are no adequate indicator of future performance. The performance of the underlyings depends on a variety of economic, entrepreneurial and political factors that should be taken into account in the formation of a market expectation.

07/12/2022 12:17:28


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