What Are Quarterly Earnings Really Worth?
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- Created on Wednesday, 10 November 2010 16:24
- Written by Kent Lucas, Editor, Safe Haven Investor
- Hits: 1373
As we wrap up earnings season, news is pouring out of major corporations left and right.
But are these quarterly earnings really relevant to the investing community?
Of course, if you're a trader and focused on short-term stock price movements, then earnings and other corporate, industry or economic news is pretty important to your daily oriented investment process.
But in the case of longer-term investing, quarterly earnings should have less relevance. And for those of you who do your own investment research and stock picking, and you're trying to find long-term investments that will be winners over three, five or 10 years, then you shouldn't be obsessed with quarterly earnings releases.
As Warren Buffett generally adheres to -- in theory -- when he makes investments for his Berkshire Hathaway portfolio, in his own words: "Only buy something that you'd be perfectly happy to hold if the market shut down for 10 years."
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Well, it's certainly not easy to take such a long-term approach to investing. And it's even harder given today's investment environment. (By the way, investing doesn't have to be complicated. Sign up for Smart Investing Daily and editors Sara Nunnally and Jared Levy simplify the market with there easy-to-understand articles.)
Our world is so focused on short-term gratification and getting rich quickly. And as a long-term investor, I both laugh and get concerned when I glance at CNBC and notice how stock graphs of daily or weekly price movements are shown.
Or how one of their popular shows is called "Fast Money." Of course they want to create excitement, short-term action to keep you watching their show.
But when I search for a long-term investment, I spend a substantial amount of time researching a company and its fundamentals. I pay the most attention to the investment rationale and whether or not it changes over time.
As an example, as my Safe Haven Investor readers know, Chevron (CVX:NYSE) fluctuates somewhat with the short-term moves in the price of oil. But I really want to make sure that my original investment theses of Chevron is intact -- that the long-term increase in energy demand is accompanied by a declining supply.
That it's a high-quality company with key global upstream operations, significant free cash flow generation, and high and rising dividends.
Thus, I do still pay close attention to the conference calls and earnings reports. But my primary purpose is to make sure there are no changes to my investment thesis -- which includes trends meeting revenue, operating or other financial measures.
And if I have an investment with a shorter-term investment horizon or thesis, then, as you would expect, quarterly news matters more.
So the morale of the earnings story is, don't get caught up in the intricacies of daily price movements and swings from quarterly announcements.
Bottom line: Pay closer attention to what management says about the outlook for their business, what's happening in the markets they serve, pricing trends, or operational and restructuring initiatives. Not whether they missed or beat the quarterly earnings estimate by a penny or two.
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