Future more important for earnings

Question: One of my companies just reported earnings that significantly beat expectations, but then the stock went down. How can this be?

Answer: The second-quarter earnings season just got underway, and it’s important for investors to remember to look past the headline numbers.

Specifically, the headlines tend to focus on two main metrics: earnings per share (EPS) and revenue. And they generally compare these metrics to what analysts had been expecting.

However, it’s important to realize that the main catalyst that determines what a stock’s price will do is the future. Therefore, it’s a smart idea to pay attention to any metrics that tell you what the company could do in the coming quarter, year or even further out, as this is what can really move a stock after a company reports earnings.

For example, if a company beats expectations on both revenue and earnings for the second quarter but warns that sales could be weak during the second half of the year, shares could easily drop despite the strong results.

Conversely, if a company misses earnings estimates but says its sales volume is great and it expects an excellent holiday shopping season this year, the stock could rise despite the miss. High-growth tech stocks do this all the time.

Be sure to consider the entire report when deciding how to invest. After all, the market certainly does.