Three Things to Watch During Earnings Season

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It's that time of the quarter again. Corporate bean counters are tallying up their company financials through the three months ending in June. Investor relations departments are squaring away the logistics for the upcoming conference calls. Investors are biting their nails, hoping that their companies don't blow it.

Relax.

Odds are that your company will come out on top on the bottom line. I'm not just offering up hollow words of encouragement. More than two-thirds of the S&P 500 companies -- 68% to be exact -- actually beat Wall Street's profit expectations during this year's freshman quarter, according to Bianco Research.

This isn't just a post-recession fluke. More than two-thirds of the S&P 500 stocks have not only met analyst targets but exceeded them in each of the past nine quarters.

That's the good news. The bad news? Well, your stock can still get pounded even after trouncing Mr. Market's projections.

Instead of getting back to nibbling on your digits, let's get into the digits that will matter this earnings season. Here are the three things that will separate the winners from the whiners as earnings season kicks off this month.

1. Guidance Is Key

Shares of premium grocer The Fresh Market (TFM) tumbled 12% after posting a quarterly profit of $0.28 a share in its latest quarter, well ahead of the $0.20 a share that analysts were expecting.

The Fresh Market sells the freshest beets. It pulled off a fresh beat. So why did investors turn on the small-box supermarket chain?

Shareholders checked out because -- a few paragraphs later in its earnings report -- the upscale grocer simply reiterated its guidance for the full year. The Fresh Market expects to earn between $1.01 a share and $1.05 a share this year, just as it predicted three months earlier. The problem with that is that it should have raised its guidance by the amount of the first-quarter beat. By keeping its outlook intact, it's actually hosing down its prospects for the balance of the fiscal year.

2. Winners Tend to Keep Winning

Apple (AAPL) has landed ahead of Wall Street's quarterly guesstimates for years. Online dining reservations specialist OpenTable (OPEN) is a perfect eight-for-eight since going public two years ago. IBM (IBM) is working on a streak of 16 consecutive quarters of blowing away the prognosticators.

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Investors may take these victories for granted, but it's not a coincidence that these stocks have also delivered juicy gains to their shareholders during their victory laps.

It's never a perfect science. A stock that runs up ahead of a strong quarterly report may actually sell off on the news. However, over time, the key to market-thumping stock price gains appears to be consistently landing ahead of the pedigreed pros.

3. Clues Are Everywhere

Investors can't limit their due diligence to checking out the top and bottom lines. Trouble spots and opportunities can be found all over the earnings report.

Athletic apparel maker Under Armour (UA) posted better-than-expected quarterly results in April, but the stock still took a beating. The problem wasn't the income statement; it was the balance sheet.

Under Armour's clothing can repel sweat, but the company couldn't repel worrywarts with concerns over spikes in accounts receivable and inventory levels. Accounts receivable climbed 48%, which was faster than Under Armour's otherwise impressive 36% spurt in revenue. Shareholders begin worrying about deadbeat clients if a company's uncollected bills are outpacing sales. Under Armour's inventory assets climbed a more problematic 68%. When inventory outpaces a company's top-line move, investors begin fretting about unsold wares that a company may have to mark down later, and wonder if a brand's popularity is peaking.

There are also clues to be smoked out beyond the earnings release. Quarterly filings with the Securities and Exchange Commission offer even more details on a period's performance. We also can't overlook the conference call itself.

Sirius XM Radio (SIRI) seemed to have initially disappointed investors with this year's first quarter until CEO Mel Karmazin hinted during the analyst conference call that the company intends to raise the satellite radio service's monthly rates soon. The news was enough to send the stock barreling toward a nearly three-year high.

So what are you afraid of? Given the summertime lull in financial news, you won't be the only one watching companies as they step up to their quarterly earnings podium.

Relax -- but pay attention.

Longtime Motley Fool contributor Rick Munarriz does not own shares in any of the stocks mentioned in this story. The Motley Fool owns shares of Under Armour, IBM and Apple.


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