Earnings and Looking Forward

We are now coming to the end of what is one of the four periods of time commonly referred to as earning season. There have been some very positive stock price reactions and some negative price reactions this time around. Now that this period is behind us, we can reflect on just what moves the stocks around. It’s not necessarily the backward looking financial results as it is the forward looking statements.

If Vroom Company (VRM) announces the company had a stellar quarter, beating all expectations that would be considered a positive development for the company. Conventional wisdom dictates that the stock should rally on this stellar result with those holding long positions very happy and traders with short positions scrambling to limit losses. Also, don’t forget, we’ll see a drop in the implied volatility of VRM options after the news has impacted the market.  

Typically after a company has released their results to analysts and the investing public, there is a follow up conference call where management discusses financial results and will answer analyst questions. Getting back to the VRM example, if during their conference call an astute analyst asks about future business prospects and the answer from management is downbeat, the stock may react in a pretty negative manner. This may leave the bulls that are not listening to the call scratching their heads and then heading for the exits. Also, those short sellers that still have positions would be relieved as the price drops. 

We take positions in stocks and stock options based on what we believe is going to happen in the future. The future price of the stock is going to reflect the future financial results of the company. When reviewing the earnings results from your favorite stocks this past quarter, make sure to pay special attention to any statements that involve looking forward.