Earnings season is upon us. It’s more important than ever to do your homework. Wells Fargo on Friday was the first portfolio name to report third-quarter results, which have been greeted enthusiastically on Wall Street. The stock is trading back at early 2018 highs and extended its winning streak to eight sessions in a row on Tuesday. Morgan Stanley and Abbott Laboratories — both Club names as well — report earnings before Wednesday’s opening bell. For Morgan Stanley, analysts are expecting earnings per share of $1.58 on revenues of $14.4 billion, according to LSEG. Abbott Labs, meanwhile, is expected to earn $1.20 per share on sales of $10.55 billion. In the spirit of Jim Cramer’s “buy and homework” rule — not just buy and hold and forget about it — we put together a checklist of things to do before and after companies in your portfolio deliver their latest quarterly results. You never want to be playing catch-up in real time while trying to make important buy, sell, or hold decisions. That’s a recipe for disaster. First and foremost, know the estimates. That way you will know whether the reported results quantitatively miss, meet, or exceed expectations. The term quantitatively is just a fancy way of saying data analysis. Sales and earnings are the line items that get all the attention in the seconds and minutes after a company’s release. But they aren’t always the most important metrics when it comes to how the stock will ultimately react. In some cases, like with Club name Microsoft and forward guidance, the key numbers are not in the releases, they’re only delivered on the post-earnings conference calls. Depending on the company, Wall Street may be more interested in profit margin dynamics, or key industry yardsticks – such as same-store-sales, also known as comps, in the retail industry to Club name TJX Companies or remaining performance obligations (RPOs) when it comes to cybersecurity and portfolio holding Palo Alto Networks . Or it could be something a bit more unique to the company such as a single product like the importance of GLP-1 tirzepatide, the active ingredient in Mounjaro for diabetes and Zepbound for weight loss, to Club name Eli Lilly . Revenue and earnings estimates can be found on stock ticker pages on any number of free financial websites and through brokerage account providers. You generally need a paid service for the more granular metrics — but at the minimum, being aware that these items are important will give you a leg up. In our week ahead columns going forward, we’ll aim to call out these estimates ahead of time. Our post-release earnings writeups also will compare the results versus the consensus. Know the key intangibles. In addition to simply knowing the quantitative numbers the Street is looking for, investors need to have a sense of the more qualitative watch items. The qualitative side deals with using your judgment rather than hard and fast numbers. When it comes to a turnaround story, it’s usually understood that the numbers aren’t going to be great and likely aren’t going to improve in a linear fashion. So, the price action is going to be less about beating expectations in terms of the financials and more about higher-level views. Is management executing on its stated plans and on a longer-term path to sustained improvement and ultimately growth? An example of this might be the right sizing of inventory and the magnitude of supply chain efficiency gains at Club name Stanley Black & Decker . We always are going to do all we can to quantify these higher-level items — and analysts will try to explain their implications for growth and profit-margin dynamics. However, those aren’t numbers that investors will compare to estimates. Rather, it’s going to be about listening to management and making the determination as to whether they are on track. Things may be happening a bit faster than expected, certainly a positive, or a bit slower, less ideal. In the end, it’s going to be more about what happens directionally over time than gains made in a single three-month period. Analyst notes are a great way to think through the more qualitative items the Street is interested in, but if you don’t have access to the analyst notes, worry not. We can usually figure out which parts of the business the Street is most focused on by studying the question-and-answer section of the most-recent earnings call or investor meetings with management at events such as industry conferences. It’s pretty simple, the more questions analysts are asking about a particular aspect of the business, the more weight it’s going to have on the stock. Earnings transcripts or replays of the call can usually be found on a company’s investor relations page. Know the setup. Once you have an idea of what you’re looking for both quantitatively and qualitatively, it is crucial to consider the price action and valuation leading up to the event. A stock being at a 52-week high or low doesn’t mean the valuation is also at one of those extreme levels. Only then are you going to get a sense of what the “buy-side” — your fellow shareholders and would-be shareholders — are going to consider good or bad relative to where the stock stands. In other words, matching estimates when a stock is at a 52-week low is going to be received a lot better than matching estimates with a stock at a 52-week high. Analyst notes and estimates are usually coming from what Wall Street refers to as the “sell-side.” Those analysts are from firms such as the big banks that conduct a ton of research that their clients rely upon. So, they are certainly incentivized to get it right. However, they make their money selling the research and/or services to clients. They aren’t the ones buying and selling shares of the stock. The “buy-side,” however, might include hedge or asset managers who are not only doing their own research but also actually participating in the market, buying and selling shares. Why do we mention this? Understanding the setup will help you understand just how high the bar is for the earnings report. If, for example, a stock has recently broken out, and shares are trading at all-time highs into the report, you can be pretty sure that matching expectations isn’t going to be enough for shares to take another leg up. A setup like that requires a “beat and raise” in which management not only reports better-than-expected results but also lifts their outlook for the next quarter or remainder of the year. Portfolio management is a must. After considering these factors, be sure to then take a higher-level portfolio management view of your investments. What that means is considering your cash levels and exposure. Exposure not only to a company you own that is reporting but all those in what we call the “blast zone” as well. For example, if a major player in the data center space is set to report, be it Club names Nvidia and Advanced Micro Devices or a supplier like Taiwan Semiconductor Management Company or customers like one of the hyperscaler cloud companies — portfolio holdings Amazon , Microsoft, or Alphabet , then you should expect all the names tied to the data center to move on the results and what management says on the call. So, you need to consider exposure through the context of the correlations between all those names. You should also be considering your cash levels as that is what will determine if you can take advantage of any weakness or at the very least ride it out. Conduct scenario analysis ahead of each report, asking yourself what you’ll do given various outcomes. In this way, you can have a plan of attack ahead of time and not be in a rush to create a half-baked plan while the stock bounces around trying to find the right price. Is there enough cash to buy weakness? What’s the current valuation? What’s your cost basis? At what level should you step in assuming no change in the investment thesis – where does technical support come in? Should the market turn, are you going to ride it out or rush for the exits? Do you have enough cash on hand to cover your needs should the position take a hit and prove to likely be dead money for another quarter or two? Are you going to take advantage of a sharp move higher and book some profits? What do you need to see to determine that it’s only the beginning of a move and not a knee-jerk reaction? These are just some of the questions to consider as you gear up to get results and hear from management. Conduct a post-earnings debrief. When the smoke clears, go back and take another look. This one isn’t part of the prep phase, but we would be remiss if we didn’t put it on the checklist and quickly touch on it. Think about what you could have done better and what you did right. Also, try to gather as many opinions as possible, especially those that disagree with your own. Only then will you ensure you have as much information as possible, really know what dynamics will drive the stock going forward, and understand where investors are now focusing their attention given the update from management. As Jim always says, he remembers his mistakes more than his victories. Either way, he knows, as all successful investors do, that hindsight is 20/20, and you can’t let past actions paralyze you or lead to overconfidence. At the same time, picking stocks is rewarding and humbling. The best way to succeed is to be prepared. (See here for a full list of the stocks in Jim Cramer’s Charitable Trust.) As a subscriber to the CNBC Investing Club with Jim Cramer, you will receive a trade alert before Jim makes a trade. Jim waits 45 minutes after sending a trade alert before buying or selling a stock in his charitable trust’s portfolio. If Jim has talked about a stock on CNBC TV, he waits 72 hours after issuing the trade alert before executing the trade. THE ABOVE INVESTING CLUB INFORMATION IS SUBJECT TO OUR TERMS AND CONDITIONS AND PRIVACY POLICY , TOGETHER WITH OUR DISCLAIMER . NO FIDUCIARY OBLIGATION OR DUTY EXISTS, OR IS CREATED, BY VIRTUE OF YOUR RECEIPT OF ANY INFORMATION PROVIDED IN CONNECTION WITH THE INVESTING CLUB. 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Andrew Kelly | Reuters
Earnings season is upon us. It’s more important than ever to do your homework.