BMGT 340 -- Final Exam Study Guide
It doesn’t matter if you didn’t study finance in college…
Or that you may not know the ins and outs of the investment industry…
Because today, I’m going to sum up my investment education into one sentence…
Whether you’re an investment banker or a casual individual investor, your portfolio will rely on this SINGLE sentence. And as you’ll see, this sentence is especially relevant today…
I remember this like it was yesterday. My professor kept repeating the same phrase over and over. And frankly, it’s one of the most important pieces of financial advice you’ll ever hear…
“The value of a company is the present value of future cash flows.”
Broken down, it means that the value of a company today is worth the sum of tomorrow’s profits. Which for us, is why it’s important to look forward when making investment decisions.
This is especially true in today’s innovation driven economy, where companies are now forced to reinvent themselves at a much faster rate. Because they know if they don’t evolve, their competition will, which could soon put them out of business.
This brings me to the short-sighted phenomenon known as earnings season…
Today, we are smack-dab in the middle of earnings season — arguably the most exciting time of the season for investors.
Four times a year, publicly traded companies release their quarterly earnings report to inform investors about their recent performance. Going back to my hedge fund days, I remember traders being propped up on the edge of their seats, ready to buy or sell solely on a company’s quarterly result.
In these reports, companies announce whether or not their performance met Wall Street expectations, and give the company’s guidance for the future. The sudden bits of information can cause stock prices to quickly jump higher or lower — which adds to the intrigue of earnings season.
Just take a look at these price jumps from this week’s earnings action:
- Netflix (NASDAQ:NFLX) jumped 9% after earnings
- TD Ameritrade (NYSE:AMTD) jumped 4% after earnings
- Vertex Pharma (NASDAQ:VRTX) surged 23% after earnings
- Harley Davidson (NYSE:HOG) plummeted 11% after earnings
But remember the most important investment lesson from my time in undergrad… “The value of a company is the present value of future cash flows.”
Notice how this statement has nothing to do with the past. The statement isn’t “the value of a company is the present value of yesterday’s cash flows,” or “the value of a company is the present value of last quarter’s earnings.”
Meaning it’s not the revenue and earnings per share from the previous quarter that should matter most — don’t get me wrong, these metrics do matter. But what long-term investors should care most about is the future outlook of the company that comes with these earnings reports.
Here’s an example from this week: TD Ameritrade (NYSE:AMTD) earned $0.44 per share vs. analyst estimates of $0.41 per share. A strong beat by the brokerage firm.
These figures show investors that an upward trend is already underway.
But what really matters to investors, and what actually sent the stock up 4% overnight, was their CEO’s comments on the company’s future. Namely, “we’re seeing healthy trends in new account growth and asset inflows from both new and existing clients, and our channel continues to break records for asset gathering.”
So whereas the earnings beat showed an upward trend was underway, this positive forward guidance outlined by the CEO shows that this trend is here to stay — the REAL reason why the stock jumped 4%.
Now I know what you’re thinking… “This stock already spiked — I don’t want to invest at these higher levels!”
And I completely understand!
Which is why I want to show you how to spot possible “Earnings-Day Heroes” before they report…
The key is finding companies with potential catalysts in their near future — some event on the horizon that could send the stock higher if it comes to fruition.
In our TD Ameritrade example, the catalyst is the broad movement of people taking their retirement into their own hands. Investors like you are tired of the mistrust and high fees associated with traditional investment advisors — which is good news for companies like TD Ameritrade.
Here are a few more catalysts that are looming in the market — ones that you can still take advantage of…
Trump’s Tax Plan– Corporations and individuals alike are on edge waiting for Trump’s tax plan. Some of the highlights are expected to be a 15% corporate tax rate, repatriation of overseas cash, as well as a simpler individual tax code. If these campaign promises come to fruition, expect to see dividend increases, increased research and development spending, and possible M&A activity.
Geopolitical Tensions– Although the ongoing tensions have been out of the media recently, I still have an eye on the rising tensions between the U.S., Russia, Syria, and North Korea. Any further developments to this situation should cause defense stocks like Boeing (NYSE:BA), Lockheed Martin (NYSE:LMT), and United Technologies (NYSE:UTX) to move higher.
Possible Mergers- I’m not suggesting you invest in a company on a hunch that they’ll get acquired. But with the recent trends in the automotive industry, and the already attractive valuations, there seems to be a few win-win scenarios shaping up. This is a topic I’ll have more on soon…
These are just a few of the potential catalysts on the horizon. And there’s plenty more opportunities where that came from. Stay tuned as we here at The Daily Edge want to be the first to bring them to you.
Here’s to growing and protecting your wealth!
Editor, The Daily Edge