Surviving the Earnings Madhouse

 | Jul 22, 2014 | 2:40 PM EDT
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Wow, that's really bad. No, that's OK. Hey, maybe it's good. No, it's not good vs. the other companies that have reported, but it is excellent vs. the cohort. Wait a second, it's trading down, let's go over it again vs. what people are looking for and maybe they will explain it on the call. Does the market have it wrong?

There. That's an adequate depiction of what goes on during earnings-heavy days like today. Quite simply, it's a madhouse.

For 48 weeks a year, there's enough time to think before you make a judgment. But for four weeks a year, of which this is one, you are up against tremendous odds, and mistakes occur frequently.

So how do you make things better? How do you figure out how to handle the pressure?

First, you avoid the battlegrounds. Those are complete no-win situations. What's a battleground? Right now, the biggest is Herbalife (HLF). You have an outspoken hedge-fund kingpin, titan or whatever in Bill Ackman saying that he's going to reveal in a huge presentation that Herbalife is a total fraud. Ackman's calm slickness makes it very clear that he's just going to decimate the stock. He's predicting a total shutdown of the company. And shares plummet.

Then he does his thing and management comes on "Squawk on the Street" and says it is the same old, same old. Others point out, as I did, that it's highly unusual that you can just charge fraud and think that you can get away with it. Still another manager comes on the "Halftime Report" and tells Scott Wapner that this $62 stock is going to $300 in five to 10 years. I am sure Ackman comes back with even stronger charges or revelations that some authority is going to step in to stop this fraud.

Back and forth, back and forth.

This situation must be avoided at all costs because no one is going to stop Ackman from making charges. The Securities and Exchange Commission seems cowed, and the stock and the company are playthings in the playground of hedge-fund life. It's a circus where fundamentals mean nothing.

Second, it's a very rare bird that comes out in a release and says, "This is a disappointing quarter and we missed expectations big time." In fact, almost every company's release is accompanied by a quote from the CEO about how great things are. It can be really egregious and painful. For example, last week, semiconductor company AMD (AMD) put out an earnings release that was extremely self-congratulatory and self-complimentary. The stock promptly dropped to $3.80 from $4.50 -- a monstrous decline.

Or take General Electric (GE), a company that comes out and says everything's pretty perfect . When I saw the earnings headlines, I was jumping for joy as my charitable trust owns it. Others were too as the stock ticked up $0.20 at one point before trading began.

But then you do the dive and realize that revenues are light. And then you listen to the conference call and you understand that the company is missing numbers in areas that other companies are blowing away estimates -- areas such as oil and gas, which are simply on fire, or distributed power, where so many are doing just fine. Or health care, where the company says, "Health care was again soft in the U.S., as we expected." Hey, I didn't expect that. I expected after last quarter maybe they fixed the problems. Nope.

Then there's transportation. It did OK in locomotives, but what I hated was, "The transportation team continues to execute well in a pretty tough environment." Huh? Transports hit new highs repeatedly. Rail is booming. What tough environment? I can see the stock going down as the words were spoken.

Appliance revenue? Down 1% on volume. Lighting revenue down. Now I am dying. No mention of getting rid of the division, even as that had been the scuttlebutt. GE Capital revenue down 6%. Shoot me. Core volume leasing was down 3%, driven by the Americas, which was down 4%. Driven? Driven into a retaining wall.

Final straw? GE's doing this big, distracting , acquisition of a French power company, Alstom, where the government is all over GE to make it -- at least I think -- as hard as possible to lay off people and clear the decks, which is what happens usually when a company is acquired. It seems like this one's going to take forever to close.

So, what's the first question? From Scott Davis at Barclays: "I think just some logistical questions on Alstom. Do they still -- I mean, how do you keep the place from falling apart, I guess, from now until you close it? I mean, do they still bid on projects and compete against you until you close? Do you have some, any control or oversight of how operations, of how things are run between now and then? Because it's going to be a little while before everything gets approved."

Of course, the company answered with a response that said, yep, they are still competing and have to go through work council approvals. And I say, that's it. Sunk. This big upside surprise is going to be a big downside stock. The rest of the questions, while cordial, were met with rambling answers that were hardly confidence-inspiring. I figure that was going to produce even more selling, even though it was a huge, up Friday.

And, of course, that's exactly what happened. The stock's been down three straight days. Let's just hope that the initial public offering it filed for Synchrony, a credit card division, gives the stock some lift. One hundred and twenty-five million shares coming right at you. Fingers crossed.

The moral? Do not trade on headlines. Do not trade on releases. They are so often wrong, not in sync with reality, or masking underlying issues. Know the expectations so you aren't fooled by the better-than-expected mumbo jumbo. Wait until you get to the guidance portion of the call before the Q&A to make a judgment. And listen to the questions. You can tell from them whether there's disappointment over the quarter.

Yep, it is that hard. And that confusing. And often -- but not too often -- that bad.

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