Earnings Expectation

Kee Koon Boon wrote Bamboo letter on 24 August 2015. He brought up the academic paper titled 'Earnings Surprises, Growth Expectations and Stock Returns or Don't Let Earnings Torpedo Sink Your Portfolio' on the topic of that Bamboo letter. It is well written. In short, that academic paper confirm that the listed companies with high growth expectation tend to have its share price being dropped too much upon the announcement of negative news.

Here, I would like to write my thought about how much we should care about short-term earnings trend and long-term earnings trend. Last year, I post a short article on my Linkedin account. On the article, with my knowledge by reading multiple sources of financial information, I, being familiar with the announcement pattern of US and Singapore-based listed companies, indirectly pointed out the obvious difference between Europeans/Japanese based financial reports and US based financial report. The former always release their forecasted data publicly.  As per my article, some European stocks released warning announcements that they fail to match their forecasted figures for upcoming quarterly earning announcement. One European-based stock in my portfolio did that. Fast forward, in few months later, it was able to recover slightly with a newer 5 years, if i recall correctly, strategy in terms of stock price trend.

This month, the zero confidence in China stock market negatively affect all stock markets in all countries. It is truly a gift to any value investors who are sidelining for upcoming undervalued stock opportunities.

Incapable top managements tend to smooth earnings on the short-term trend. Eventually, over time, reality prove that it is not possible to smooth earnings any further. If there is a change in top management, we need to see what choice the new top management has taken - generally, their mission statement theme will be at least one of the key drivers of earning trends.

If we look at Radioshack, it has no support from debtholders, which are making odd moves to prevent the sale/closure of the shops before it filed chapter 11. Even though it has support from major shareholder, it still choose the last option, which is to file chapter 11. It is probably abnormality where your sound investment thesis may fail - I did make significant loss on this Radioshack investment. Not only mission statement theme, support from all sides are important too in order to have the plans executed.

It is far better to invest in listed companies with capable management who has been working for them for a long time. Earning trends will reflect of what they have done despite of lumpy earning trends. Eventually, long-term earning trend is much better picture as you are analysing the company's earning power. It is the route we should take as value investors when we see companies with battered stock prices due to macroeconomics reasons.

I hope to share more of my thoughts and journey here in future if I have any.



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