Each financial quarter, publicly-traded companies are required to submit their earnings to report their performance. Through these reports, shareholders are made aware of the general 'health' of the company- its net income, sales, EPS (earnings per share), expenses, etc. Often, current and potential investors compare an earnings report from previous years.
There are many different ways to analyze an earnings report, but a quick and easy way is to compare the actual reported figures versus what is expected by the market beforehand. Before an earnings report is announced, analysts are polled in advance and asked what figures they are expecting. The media takes the average from analysts and releases the 'forecast' numbers to the public. The market then, in turn, takes the 'forecast' numbers and factors them into the price of the stock.
As soon as the earnings report is made public, the market swings into action. If the numbers released are better than expected (say, the net profit is higher than what analysts were expecting) and other reported figures in the report are generally better than expected, the stock will immediately jump up. If the earnings is announced after market hours, then the opening price of the stock jumps up the next day.
Most investors and traders already know this information. What they might not be knowing, however, is exactly how much of an impact an earnings report has on a stock's price.
From 1st October onward, companies have started releasing their Q2 earnings reports for FY 2014. Often, investors and traders simply look to 'buy' or 'sell' depending on whether or not the reported figures are better or worse than analyst estimates. However, since actual numbers are almost immediately priced into a stock, it is wiser to know the potential impact of an earnings report on a stock's price.
Investors usually look at a company's net profit and compare it to the expected figure to gauge whether or not a company beat analyst expectations. Therefore, if we look at the Q1 earnings reports for FY 2014 and look the net profits report for all 30 companies that comprise the Sensex, we can see exactly what kind of an impact an earnings report has an a stock's price.
Here is a table that does exactly that. It takes into account:
*FS: Forecast spread **NPM: Net price movement
As you can see, the average price movement due to an earnings report was 3.06 per cent.
Any investor or trader knows that 3% is quite a substantial move in prices. Its impact simply cannot be ignored.
How can an investor take advantage of this knowledge? Many a time, the market does not immediately and accurately price a stock based on the released earnings report. Therefore, a savvy investor/trader would look for opportunities such as
TEAM RYR&CO.
There are many different ways to analyze an earnings report, but a quick and easy way is to compare the actual reported figures versus what is expected by the market beforehand. Before an earnings report is announced, analysts are polled in advance and asked what figures they are expecting. The media takes the average from analysts and releases the 'forecast' numbers to the public. The market then, in turn, takes the 'forecast' numbers and factors them into the price of the stock.
As soon as the earnings report is made public, the market swings into action. If the numbers released are better than expected (say, the net profit is higher than what analysts were expecting) and other reported figures in the report are generally better than expected, the stock will immediately jump up. If the earnings is announced after market hours, then the opening price of the stock jumps up the next day.
Most investors and traders already know this information. What they might not be knowing, however, is exactly how much of an impact an earnings report has on a stock's price.
From 1st October onward, companies have started releasing their Q2 earnings reports for FY 2014. Often, investors and traders simply look to 'buy' or 'sell' depending on whether or not the reported figures are better or worse than analyst estimates. However, since actual numbers are almost immediately priced into a stock, it is wiser to know the potential impact of an earnings report on a stock's price.
Investors usually look at a company's net profit and compare it to the expected figure to gauge whether or not a company beat analyst expectations. Therefore, if we look at the Q1 earnings reports for FY 2014 and look the net profits report for all 30 companies that comprise the Sensex, we can see exactly what kind of an impact an earnings report has an a stock's price.
Here is a table that does exactly that. It takes into account:
- Company name (all 30 stocks from the Sensex are included)
- Q1 net income that was expected by analysts before the earnings report
- Actual Q1 net income that was reported
- Company's earnings report date
- 'Forecast spread' (in percentage) between the actual and expected figures
- Opening price for the stock on the date the earnings report was released
- Closing price for the stock the immediate next trading day after the earnings report was released.
- Net price movement due to the earnings report.
| Co name | Net income forecast | Net income actual | FS* (%) | Release Date | Open price | Next day close | NPM** (%) |
| STER | 1,085 | 934 | -13.92 | 25.07.13 | 82.10 | 77.35 | 6.14 |
| TATA MOTORS | 2271 | 1726 | -24 | 7.08.13 | 285 | 277.90 | 2.55 |
| SBIN | 3598 | 3241 | -9.92 | 12.08.13 | 1664.15 | 1,620 | 2.73 |
| HDFC | 1277 | 1173 | -8.14 | 19.07.13 | 829.05 | 830.70 | -0.20 |
| INFY | 2318 | 2374 | 2.42 | 12.07.13 | 2781.15 | 2746 | -1.26 |
| ICICI BANK | 2237 | 2274 | 1.65 | 31.07.13 | 925 | 916.30 | -0.94 |
| HDFC BANK | 1852 | 1844 | -0.43 | 17.07.13 | 677.80 | 682.50 | -0.69 |
| HINDUN LVR | 876 | 1019 | 16.32 | 26.07.13 | 679.50 | 637.50 | -6.18 |
| TCS | 3714 | 3831 | 3.15 | 18.07.13 | 1680 | 1743 | 3.75 |
| RELIANCE | 5270 | 5352 | 1.56 | 19.07.13 | 919.05 | 907.50 | -1.26 |
| DLF | 119 | 181 | 52.1 | 12.08.13 | 137 | 151.60 | 10.66 |
| TATA STEEL | 316 | 1139 | 260.44 | 13.08.13 | 233 | 249.25 | 6.56 |
| ITC | 1931 | 1891 | -2.07 | 25.07.13 | 373.90 | 368.80 | 1.38 |
| M&M | 873 | 938 | 7.45 | 13.08.13 | 870.80 | 873.40 | 0.30 |
| BHARTI ARTL | 613 | 689 | 12.4 | 31.07.13 | 314 | 340 | 8.28 |
| HINDALCO | 455 | 474 | 4.18 | 13.08.13 | 280.90 | 319.40 | 13.71 |
| LT | 937 | 756 | -19.32 | 22.07.13 | 977.90 | 899.65 | 8.7 |
| ONGC | 4900 | 4015 | -18.06 | 12.08.13 | 275.80 | 275.45 | 0.13 |
| MARUTI | 678 | 632 | -6.78 | 25.07.13 | 1420.40 | 1373.40 | 3.42 |
| BAJAJ AUTO | 743 | 738 | -0.67 | 19.07.13 | 1900 | 1985.65 | -4.31 |
| SUN PHARMA | -2635 | -1276 | -51.57 | 12.08.13 | 521 | 547 | -4.75 |
| BHEL | 800 | 465 | -41.88 | 3.08.13 | 150.10 | 120.20 | 24.88 |
| COAL INDIA | 4087 | 3731 | -8.71 | 3.08.13 | 271 | 264.85 | 2.32 |
| CIPLA | 328 | 485 | 47.87 | 8.08.13 | 391.75 | 415.80 | 6.14 |
| WIPRO | 1646 | 1623 | -1.4 | 26.07.13 | 380.10 | 409.30 | -7.13 |
| HERO MOTO | 545 | 549 | 0.73 | 24.07.13 | 1772.25 | 1831.95 | 3.37 |
| JINDAL STL | 702 | 494 | -29.63 | 30.07.13 | 199 | 198.55 | 0.23 |
| NTPC | 2407 | 2527 | 4.99 | 30.07.13 | 141.60 | 130 | -8.19 |
| TATA POWER | 277 | -115 | -141.52 | 6.08.13 | 83.05 | 76.90 | 8 |
| GAIL | 988 | 808 | -18.22 | 25.07.13 | 306 | 295 | 3.73 |
As you can see, the average price movement due to an earnings report was 3.06 per cent.
Any investor or trader knows that 3% is quite a substantial move in prices. Its impact simply cannot be ignored.
How can an investor take advantage of this knowledge? Many a time, the market does not immediately and accurately price a stock based on the released earnings report. Therefore, a savvy investor/trader would look for opportunities such as
- A stock's earnings report is much better than expected by analysts, but the stock price has not risen proportionately. The investor could look to buy in such a scenario.
- A stock's earnings report is slightly better than expected, but the stock price has shot up much more than it should have (under normal circumstances). The investor could look to short-sell in such a scenario.
- A stock's earnings report is worse than expected by analysts, but the stock price has, for no clear reason, gone up. The investor could look to short-sell in such a scenario.
TEAM RYR&CO.
No comments:
Post a Comment