Earnings -- Plus, One Sentence That Could SAVE Your Retirement
“This is the most important lesson of the entire semester.”
That’s what my finance professor said in front of a 300 seat auditorium.
Then she said it again.
“Everyone, wake up! This is the most important lesson of the entire semester.”
I remember this like it was yesterday. She 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.
Whether you’re an investment banker or a casual day trader, your portfolio will rely on this SINGLE sentence. And today, this lesson is especially relevant…
Here’s what she was repeating:
“The value of a company is the present value of future cash flows.”
Broken down, she’s saying 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 seeing traders 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 yesterday’s earnings action:
- McDonald’s (NYSE:MCD) spiked 5%
- Caterpillar Inc. (NYSE:CAT) spiked 8%
- Freeport McMoRan (NYSE:FCX) was up 6% yesterday
But remember what my professor kept repeating in that 300 seat auditorium… “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 yesterday: Caterpillar Inc. (NYSE:CAT) earned $1.28 per share vs. $0.62 expected by Wall Street, which was a massive beat for the machine manufacturing company.
This demonstrated that an upward trend was already underway, which is good news for investors.
But what should really matter to investors, and what actually sent the stock up 6% yesterday, was Caterpillar raising its guidance for full-year earnings to $3.75 per share from $2.90 per share.
This tells investors that the upward trend from last quarter is here to stay.
In the example of Caterpillar, the future prospect of a Trump infrastructure plan has a lot to do with raising their full-year outlook. Which is why I want to stress the importance of being aware of future catalysts that could impact an investment.
For every stock in every sector, there is a potential catalyst that could send the stock higher or lower. And here at The Daily Edge, we want to be the ones to bring it to you.
So here’s a few potential catalysts that we have on our radar that could soon cause big shakeups in some sectors of the economy:
Trump’s Tax Plan– A broad overview of President Trump’s tax plan is expected to come out later today. Some of the highlights are expected to be a 15% corporate tax rate, possible repatriation of overseas cash, as well as a simpler individual tax code.
Geopolitical Tensions– On Monday, I outlined my interest in defense stocks Boeing (NYSE:BA), Lockheed Martin (NYSE:LMT), and United Technologies (NYSE:UTX). And with President Trump calling the entire Senate to a White House briefing on North Korea, this sector could see increased demand quickly.
Booming Banks– Banks have been a beneficiary of the recent uncertainty, as the volatility has increased trading profits. On the horizon are additional rate hikes and deregulation, for which banks stand to benefit greatly.
That’s it for today! I’ll continue to closely monitor earnings season, and bring you any potential catalysts that may shakeup markets.
Here’s to growing and protecting your wealth!
Editor, The Daily Edge