Thursday, 28 October 2021

Earnings Season: Tricks that Companies Use

The earnings season is up and this is when companies share to investors and the world how their business performed in the just-finished quarter. During this time, investors try to gauge their confidence and strategy with the company. However, companies do use tricks to create a positive image to the investing community despite some bad news like losses or lackluster earnings. 

Timing of the Release

Communication teams who want to minimize the effect of a bad earnings report (or bad news) will sometimes try to release the results when it suspects the least number of people are monitoring.

In the market nowadays, it boils down to the general timing of the release instead of a specific day of the week. A company might want to announce their earnings after hours when there is usually a lower level of investor attention.

On the flip side, in order to reduce scrutiny on a bad report, the numbers may be scheduled for a reveal on a day where there are already hundreds of other companies that are reporting and the markets are distracted. 

Communication Cloaking 

Because of the full and fair disclosure requirement, companies are required to disclose both the good and bad information about a certain quarter in their earnings reports. The communication teams, on the other hand, may try to bury the bad news by using phrases or wordings that may disguise what’s really going on. 

You will also find that the information they don’t want you to see will be at the bottom of the report and they may be paired with other information. For instance, the release may talk about upcoming products and upbeat, forward-looking news first before digging into the bad news. 

Enhancing Information 

Some companies and their investors-relations team will emphasize headlines and information in an earnings release and this information are usually what they want the community to focus on. This is not a trick created to fool investors, but it can take advantage of those who are too lazy to read closely. 

It’s better for investors not to be hooked with any highlighted ideas and read the full release. They can also look for future guidance if it is available. 

Increasing Buybacks of Stocks 

While stock buybacks are widely considered a good thing, there are boards who will authorize a buyback as part of an effort to make their stock look more appealing to the investment community. 

These boards or companies may want to complete such a repurchase but you may find companies that announce buybacks in conjunction with or just right after a bad news is released. 

Good News that (Try to) Offset Bad Ones 

There are companies that will establish share buyback programs to offset bad news. There are still other tricks that they use as well. 

Some companies will announce a major new customer, a massive order, store opening, a new product, or a new hire around the same time that bad news is released. Again, the idea is to offset the bad news and make the investment community think that the situation isn’t as bad as it seems. 

What you can do is read the fine print and the hidden news stories to help you find the stock’s real story. 

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