Who Cares About Company Earnings?

You should, because paying just a little attention can make you rich.

Welcome to Dividends with Roger Conrad! I hope everyone is having a great spring weekend.

If you like what you’re reading here, you’ll want to check out the paid version of my service Dividends Premium. It includes my diversified high dividend portfolio, Dividends Premium REITs with extensive coverage of 84 real estate investment trusts and 24-7 access to my Dividends Roundtable, which I host on the Discord application. Thanks for reading!—RC

So many numbers I wouldn’t know where to start looking. Why does it matter what a company earns? It seems like half the time stocks drop when the news is good, and they rise when it’s bad. I can never figure it out. Don’t the companies just lie anyway? Just thinking about this gives me a headache.

I’ve been in the investment advisory business for about 40 years now. I’ve heard all these reasons why analysis doesn’t matter. And I expect to learn some new ones this summer, as I attempt to familiarize two mathematically inclined college students with investment markets.

It’s also worth again noting that the investment public in general appears to agree it’s not worth troubling ourselves with company earnings. Last year for the first time ever, the amount of money passively invested in the stock market exceeded what was actively managed.

For many if not most investors, it’s apparently too much trouble to even choose someone else to manage their money. And as a result, they’ve been herded into trillion dollar funds managed by algorithms they’ll never have the opportunity to understand—and that work until they don’t.

Just ask owners of all of those “Target” Funds that were locked into shifting all their assets into bonds earlier this decade, just as interest rates were soaring and bonds were crashing.

I have nothing against bonds. In fact, you can make good money investing in them. And I recommend anyone interested check out my friend Elliott Gue’s Substack column “Smart Bonds.”

But you’ll never do any better than average buying bonds in a Target Fund. And in anything other than a bull market, you’re at risk to doing a good deal worse.

A lot of passive investors are unfortunately finding out this year that this applies to the stock market as well. Bottom line: Like everything else, you get out what you put in. And when it comes to investing, that means spending the time to look at the numbers—and yes, company earnings!

I’m certainly not deaf to the reasons why so many people would want to spend as little time as possible with their investments—including the paralyzing fear they’ll do something wrong that will ruin their chances at retiring before age 90.

But let me share three things I’ve learned looking at literally hundreds of thousands of earnings reports that will make you a better investor. And I promise you, you won’t spend hours getting lost in numbers and jargon that actually really don’t matter when it comes to building your wealth.

#1: Don’t take someone else’s word for how a company did.

When TV personalities comment on earnings, they’re basically regurgitating comments made by Wall Street analysts who will answer media calls. You can bet it’s not what firms are saying to top clients.

And if you’ve ever listened in to a company guidance call—or even read a transcript of one—it becomes pretty obvious analysts don’t have all the answers either, not matter what B-school they attended.

An experienced pro who knows the right questions will keep management on their toes. And you can really pick up interesting insights, not just about the companies themselves but about the industries they operate in.

But the game that’s played with “expectations”—with “misses” triggering selling etc—is frankly comical for anyone with an investment time horizon of more than a few days. And consider senior analysts will delegate earnings calls they care less about to junior analysts fresh out of B-school.

#2: For real answers always go to the source.

Most companies provide the following to the public when they announce quarterly earnings: A press release with operating highlights including numbers, A 10-Q (quarterly) or 10-K (annual) document filed with the US Securities and Exchange Commission and available on the EDGAR site, A transcript of the earnings call posted on company websites and in many cases Seeking Alpha and a Power Point presentation pdf distributed or presented to analysts and also on the website.

The SEC documents are dense. But unlike press releases and presentations, the numbers in the statements are hard. And all of a company’s blemishes and challenges that can affect returns must be disclosed in the text.

When I have to be sure of a number, I’m always going to look at what’s on file with the SEC. Yes, it’s still possible the filer is committing fraud—Enron filed SEC documents for years and in fact had an investment grade credit rating just before imploding in late 2001. And the SEC is arguably always understaffed, even in the best of times.

But filing false information in SEC documents—even unknowingly or inadvertently—is a federal crime. And as an independent director at a closed-end fund for 10 years, I can tell you we spent much of our time ensuring accurate filings, right down to the comma.

The press releases and presentations are good for broad strokes about what companies are up to. But when I want to know what I’m missing, Q&A in the earnings and guidance calls is often super helpful.

#3: Don’t try to analyze everything, focus on a few key facts.

I analyze stocks for a living. I also love thinking about numbers. And I don’t mind making sense out of a wall of data, even when it’s prepared with an AI assist.

Trying to analyze everything, however, is counterproductive no matter what your profession. So here are two things I think look at. If you’re interested in how I employ them with individual companies, I invite you to check out my Dividends Premium service.

First is current management guidance. I’m not so much interested in what the numbers are now, as how they compare to what the company has said previously.

What I’m after is how well management is delivering on its promises. And whether you’re talking about earnings per share, revenue or cash flow, the important thing is consistency.

If a company is forced to reduce guidance, it’s a warning that either external conditions are becoming more difficult to deal with, or worse that it’s failing to execute priorities. That’s a red flag. Reducing guidance two consecutive quarters is almost always a good reason to sell.

Second is debt. And if I have to pick just one thing to look at, it’s the 12-month change in interest expense. This can be found in the “Income Statement,” also known as the “Consolidated Statements of Operations and Comprehensive Income.” Some companies will attach it to their earnings press release. But you can always find it in SEC-filed 10-Qs and 10-Ks.

The rule of thumb here is also pretty basic. We want numbers to be pretty consistent.

Interest rates have risen the past three years. So not too many companies’ debt interest expense has dropped the last 12 months. But if interest expense is up 20% or more, it’s a potential red flag.

It may be the company has made a major acquisition, in which case the additional debt may not pose a major burden. But we’re going to want to do a little investigating to be sure.