Check to see if the company is growing its sales and, if so, whether the sales growth is sustainable or related to a one-time event. In addition to checking the sales numbers, you'll have to skim through the entire press release in order to see what management said about the quarter. The numbers plus the comments can tell you if the company experienced growth or just got a windfall.
In general, smaller companies, those in the $100 million to $1 billion sales range, should grow more than 10% annually whereas larger companies should be growing by at least 3% a year to be of interest.
Lastly, compare a company's growth in sales not only from last year but from the last quarter and if quarterly sales showed an upward trend, it's usually another good sign.
A company's margins generally improve or deteriorate depending on how well it is managed. If the sales line is going up but costs are going up faster, something is going on there although it's not necessarily bad news. It could be that the company is entering into a new business, launching a new product, or expanding its footprint. For example, Amazon frustrated investors for many years by investing heavily in warehouses on a coast-to-coast basis before that infrastructure spending finally started paying off.
On the other hand, it could mean that the company is just doing a poor job of managing its expenses so its management's discussion of the quarterly results will help you determine which it is.
Many companies offer Wall Street some sort of guidance on future earnings and it's nearly always important and how "the Street" reacts to the news is equally important. That is, the company's guidance for the next quarter may be better or worse than Wall Street analysts are expecting and those expectations will move the stock price up or down, at least short-term.
Delving a bit deeper into the psychology behind earnings guidance, if a company raises its guidance for the current quarter but downplays expectations beyond that, the stock will probably sell-off. If a company reduces its estimates for the current quarter but raises its full-year estimate then the stock will probably take off.
As a rule of thumb, keep your eye on the long term. Most of the time, Wall Street will overlook a short-term stumble if it is convinced that there is an upwards catalyst on the horizon.
Stock Buyback Programs
When a company uses its cash to buy back its own stock, it's usually a good sign that management believes the stock is undervalued. Repurchase programs will probably be mentioned in the company press release although management may have other motives such as wanting to reduce the total share count in the public domain. This may be in order to improve financial ratios or boost earnings, thus making the company more attractive to the analyst community. But it may be a public relations ploy to get investors to think the stock is worth more. Share repurchase programs should be a sign that better times are ahead for the company.
In general, you want to see the total number of outstanding shares staying the same or falling, perhaps as a result of a repurchase program. That means future earnings are spread across fewer shares, making earnings per share higher. As shares outstanding increases, earnings are divided among a larger pool of investors and become diluted, decreasing your potential for profit.
It's virtually impossible to predict whether a new product will be a winner or not but it's a big mistake to overlook the stocks of the companies that make them.
New products often garner the most attention from consumers and investors and often helps move the share price higher in the near term. The company may have spent a huge amount of money on R&D and promotions as it positions itself to take in a whole lot more money. For example, in the early part of the 2000s, Apple released the iPod, that was met with skepticism by some investors and analysts. They believed that the company may be unable to deliver meaningful revenues from it when in fact it propelled Apple's growth throughout the entire decade.
Of course, new products don't always turn out to be cash cows for the companies that produce them, but if you get in on a good one early, there's a dramatic potential for profit.
The Subtleties of Language
As you read the press release, consider your impression of what occurred in the quarter. Management may have talked up the company's many "opportunities" and relished its past growth or it might have outlined the many "challenges" facing the company. Management might identify potential catalysts for the business, such as new products or acquisition candidates. In any case, that language can be as important as the earnings guidance numbers.
The language used in these press releases is very deliberate and it is reviewed by many eyes in the public relations and legal departments. An upbeat report is an especially good sign, while a report containing muted language should be viewed with suspicion.
Finally, look at the stock chart for the last year and last five years. Are there seasonal variations in the stock price as you may find it routinely trades higher or lower in certain seasons.
Determine the trend this stock is trading in: Is the stock trading above or below its 50-day and 200-day moving averages? Is it a thinly traded stock, or does it trade millions of shares per day? Has the volume recently increased or decreased? A decreasing volume could be a sign of less interest in the shares, which could cause a decline in the share price. Increases are generally favorable if the underlying fundamentals are solid, meaning the company has solid growth opportunities and is well-capitalized.
The Helicopter View
Beyond the press release, consider the macro trends that might impact the stock such as rising interest rates, higher taxes, or consumer behavior all of which may have an impact on the stock. Other external factors, such as an industry-wide downturn, might affect the company and these considerations can be as important as the fundamentals and technical indicators.
For example, in the mid 2000s Continental Airlines was considered in fairy good shape but higher fuel costs and a number of bankruptcies within the airline industry seemed to be holding the stock back. Continental expected to substantially grow its earnings in the near term but the sector outlook appeared dismal. This resulted in a merger with United by the end of the decade.
By necessity, investors and their brokers often need to analyze companies on the fly and make snap decisions to buy, sell, or hold. Zeroing in on the key information as previously described, can help them avoid making a rash decision.
Glenn Curtis is a freelance financial writer and analyst contributing to the likes of Investor’s Business Daily, The Washington Times, Forbes, Yahoo Finance and CNN