Investors sometimes overlook earnings calls, but the fact is that they can be a very important part of your investment process. Today, we’ll look at why earnings calls are so important and how you can use them to create your investment thesis and monitor your stock portfolio.
What are earnings calls?
An earnings call is a corporate event for public companies, usually through a webcast or teleconference that brings together the company's management, investors, and analysts.
Usually, the CEO and CFO discuss the fiscal period and provide guidance on the business’s future. Earnings call also allow analysts and investors to interact with top-level executives and ask questions, to understand the business and its future better.
6 Reasons why earnings calls are important
Reading and even participating in earnings calls can be a great way to research a company and get a lot of insights into what is going on behind the stock price.
Let’s look at a few reasons why earnings calls are so important.
Future guidance on the company’s financial performance is critical to understand the value of a stock and whether or not it will go up or down. It is common for the management to reveal their guidance in an earnings call. This can be extremely useful to incorporate management’s own future view into your research and fundamental analysis.
It is common to discuss other peers and the industry as a whole, which can be extremely helpful for investors in determining whether or not the stock is worth buying or selling.
Moreover, analysts on the earnings calls will ask questions to understand the business, update their models, release estimates, and adjust their stock ratings. Listening not only to the management team but also to analysts that have sometimes covered the company and the industry for years can help you understand where the company is headed.
2. Check management’s view of the company
Besides understanding the future guidance for the company, it is also crucial to know the management’s opinion of the operational side of the business. While investors are usually aware of the numbers and the stock price, a lot is happening in a company behind the stock.
Earnings calls allow management to shed some light on the operational side of the business that analysts and investors sometimes overlook.
3. Evaluate the management
As an investor assessing whether the management team is capable of doing their job, and keeping their promises is not an easy task. However, earnings calls allow investors to better understand the management’s view of the business, and what their vision is.
By reading or hearing earnings calls regularly you can easily understand whether or not the management team follows up on their commitments, and whether or not their vision of the business is in line with what actually happens.
4. Understand what analysts are looking at
If you are researching individual stocks, and you are unsure how to do it, what better way than to see exactly what questions analysts are asking on the earnings calls? Any topic that they bring up, is certainly important, and it is also something you should research about the company and industry.
Analysts following companies in the same industry, have a lot more insight into what is actually happening, and reading their questions and understanding the intent behind those questions can be helpful when determining whether a stock is a worthy investment.
Finally, analysts usually ask questions so they can build financial models of the company and provide hints as to what to look for in the company’s financial statements.
5. Ask questions
While it is not very common, it is possible for investors to participate in earnings calls, especially those of small companies that have very little to no following. This is the perfect opportunity to interact with the management team directly and ask the questions you want to be answered.
If you have any doubts about the company, or some aspect you would like to
6. Get insights into the company and industry
Earnings calls are essential in that it gives investors deeper insights into the company. Additionally, earnings call from other competitors, and other companies in the industry also allow you to have a better understanding of a single company, and its peer group.
Knowing how the industry is behaving and how companies are currently operating can be a significant advantage when picking stocks.
Investors who conduct thorough research, and base their stock picks on fundamental analysis can benefit from hearing, reading, or even participating in earnings calls. It is a simple way of getting even more information on a company and its industry.
For these reasons, part of every stock research process should include an overview of the earnings calls.