Over the past 10 years, I have learned a great deal about the Wall Street financial services community. I know how to smell an earnings miss or beat in the day before the results are posted (it's all leaked).
I have a good idea on the key items the Street is locked and loaded on for a specific company's financial report. For example, the direction of new orders growth/contraction from the preceding quarter for homebuilders is pretty important. I have even developed a sixth sense for determining if a stock selloff is overdone or not based on a certain company development. All of this is darn cool; I love having these secret skills!
However, I am not especially proud of is this reservoir of analytical jargon, such as these top words and phrases:
- Deep dive
- Drill down
- Step function
- Circle back
- In our view
- Top down
- Bottom up
- Help me understand
I am a little rusty on the vernacular because I have done everything in my power to unwind this stuff from my brain. I strive to talk to clients and people in the business using clear, understandable language.
Let's run through some of the leading phrases used by corporate executives this earnings season, all of which, as usual, are designed to confuse investors and toss analyst crews off the beat of a negative development.
- CEO of Arkansas Best (ABFS): "The company as a whole now has greater stability and resources with which to continue providing the holistic transportation and logistics solutions sought by customers."
- CEO of Monro Muffler Brake (MNRO): "Looking forward, we plan to continue to leverage our strong business model."
- CEO of Polaris (PII): "Sales and net income have more than doubled since 2009, testifying to the strength of our strategic plan that has served as a roadmap over the past five years as well as our relentless execution of its core principles."
I highly encourage eager investors to take back financial releases from executives who speak as if they were in a strategy session instead of in a public setting where someone with no financial services background may be listening to an earnings call. Follow my guide, and just say no to jargon.
Decode the Phrases
There is indeed a universal set of phrases and words designed to throw the investor off.
- "Performance was in line to our expectations." Translation: The numbers may surely be in line with the earnings warning management issued three months ago, but that could not be what the market expected, and it's not good for investors as the business is lagging for any number of reasons.
- "Sales and earnings are poised to reaccelerate in the back half of the year." Translation: Forget the bad quarter we just announced, maybe even the current quarter. By the end of the year, we will be in a much better position to shock and awe you with amazing financials. (I tend to just shake my head when I hear this uttered.)
- "We believe our unexpected soft earnings were more a function of the macro environment." Translation: The economy is getting the blame for a bad quarter; it surely has nothing to do with market share loss in key product lines or increased discounting to maintain share, etc.
- "We are using the fiscal year to invest more in the company." Translation: Earnings won't be great anyway so why not spend more so they will be good in the next year? By the way, in doing so we really think earnings could be weaker than the market is forecasting.
So what should you listen for to try to determine if something isn't quite adding up? I search for "action words" around the company's weak performance. If sales are down "significantly," year-over-year, or more than expected, that would call into question management's guidance for a second-half recovery. That word suggests fundamental problems in a market for a product or a service.
How much attention should investors pay to earnings misses? It depends on the sentiment in the marketplace at the moment. For instance, if the market has high expectations for companies and a big name warns out of the blue, it could be a sign of bad things to come for other companies. Stocks would be a potential contrarian sell at this point. However, if a sea of companies are missing on earnings and guiding down, and the market is down (such as the current environment), and stocks are not reacting so negatively, there could be a case to buy on the fundamental weakness. The market would be trying to say it has priced in enough future earnings risk.
A miss or beat start can give immediately insight into a company's business health. Think of it from this perspective: An earnings warning is like a shock to a business. Months in advance, management developed its internal projections and then most likely shared them with investors and analysts. Any divergence off that track is a sign something has gone wrong, either in the economy (and the market has begun to price that in months earlier) or in what the company is bringing to market and key clients.
Finally, a string of misses will make me ask if the business equipped with new products or the strategy to pull itself out of its malaise. If not, is the company or stock broken? Or is a management change needed?