You want to play earnings season? I am against it. You want to invest in earning season? I am all over it. You want to trade the quarter ahead of time? I am against it. You want to invest some before and then some after, so you can kick it out if things go wrong and buy more if things go right? I am in.
That's what I think about, as earnings season goes into full swing this morning.
I didn't always feel like this. In the old days at my hedge fund, I used to try to approximate reactions as best as I good, and place heavy bets on what will happen. I had as much legal information as possible and always thought I had an opportunity to make a good call ahead of time.
But that was then, before the government leveled the playing field. You could meet with analysts and companies without everyone knowing everything. I was very much in favor of leveling the playing field, which is a passion of mine.
That said, if you couldn't get a jump on the masses by being a big institutional investor, you lost plenty of edge that might have been needed. The guessing game had been tilted in your favor.
No more. Again, a good thing.
Then I started running a charitable trust where, implicitly I don't trade, I invest. We can't quick flip. We want to make considered opinions based on available facts. We look at the research and our goal is to try to figure out if the research, what Wall Street is saying about companies, adds up to anything that's substantive enough to make a view that could be dead wrong.
That might trigger a bigger position ahead of the quarter and we have had some very good ones like Chipotle (CMG) , like Honeywell International (HON) , like Advanced Micro Devices (AMD) , like Danaher (DHR) and many others.
But it's fraught. We have whiffed on a Footlocker (FL) and on a Kohl's (KSS) . Those remind us how dangerous this game can be. We thought more about Allergan (AGN) than we should have. We didn't think that Anadarko Petroleum Corporation (APC) would be as terrible as it was. Luckily we got bailed out by a bidding war between Occidental Petroleum and Chevron. But I don't want that to be why you make money at home.
So with that in mind, let me give you some time-honored rules about how to approach this season.
First, there are 12 weeks a year when so much information comes out at once that you simply can't do a good job analyzing companies on the fly. I always tell my wife, Lisa, make no plans for earnings season. We even delayed our honeymoon, because of earnings season -- certainly a suboptimal way to start a marriage, but you deserve it even if that, in retrospect, turned out to be ill-advised.
But it was not as ill-advised as trading a big block of Alcoa (AA) while my daughter was being born or trading Union Carbide options the day my mother died, but that was then and this is now. As "Confessions of a Street Addict" made clear, I have never advertised myself as a saint. These days, my watchword is "Not Today, Satan" -- I even have a hat that says that, but your takeaway should be that this is an important season, it only happens once every three months and you need undivided attention.
Two, undivided attention means that you have to listen to the conference call before you make a decision. Too often the headlines are written by machines that want to get ahead of other machines. If a company says it "boosts forecast" in the release, the headlines hit the tape and you can get bamboozled quickly. I need you to avoid the itchy finger and start buying.
I can't tell you how many times I have seen prominent companies like JPMorgan Chase & Co. (JPM) , Boeing (BA) , Caterpillar (CAT) , 3M (MMM) and Oracle (ORCL) trade up and then trade down and you get obliterated. There have been calls where, smack in the middle, or even in the question-and-answer part, we learn that the quarter just announced was the high-water mark for the year. That happened on a Caterpillar call that the stock is still trying to recover from.
If you don't listen to the call, stop listening to me and go buy an index fund. I can't countenance investing, unless you invest the time.
Three, consider where a stock has come from before you decide you want to buy it, before the call. All of the bank stocks have been red-hot going into the quarters this week.
Nothing could be worse for them. They ran because the government blessed aggressive buybacks and dividends. Now we are in the cold, hard world of things like net interest margin, efficiency ratios, loss ratios and trading. So you can have a quarter where that of Citigroup (C) that is truly terrific, but because it ran so much people simply didn't care and it rallied and then sold off. That's just the power of the advance-and-profit-take principal that is time-honored.
If a stock is down coming into the quarter that's a terrific opportunity. UnitedHealth Group (UNH) reports on Thursday. If that stock is down ahead of the quarter I think that's a good one. I expect a terrific quarter and the Washington heat died down against managed care, as the president made a major policy shift in its favor.
At the same time Johnson & Johnson (JNJ) reports tomorrow. It is down big, because of the presidential shift toward trying to get U.S. drug companies to try to charge no more than a basket of prices amounts to. That would be disastrous for JNJ. But if the stock gets hit against on a monster good quarter, that could be opportunity.
Four, do not be afraid to go against the grain on the stocks of great companies. Last week I told you that because PepsiCo (PEP) had run up into the quarter, skeptical analysts will not help the cause. That's exactly what happened and after trading at $134-and-change in pre-market, up more than a dollar, it plunged to $131 after the call where I told you to buy it hand over fist. Now it is back above where it was before it reported and almost challenging the pre-market level. That's because there was nothing wrong to begin with and much that is right.
Finally, No. 5, never forget that we live in a time when the S&P 500 can play havoc with any stock. When I got in this business 40 years ago what mattered most was the company's earnings, then the sector it was in, and then the market as a whole.
Now it is exactly the opposite. The market as a whole and the sector exchange-traded funds are much more powerful than the words of a given company.
Please, though, understand that's a total blessing. We want just that. So many people will buy the stock of a company ahead of the quarter and get gobsmacked by big events. Can you imagine if you bought Merck (MRK) for the quarter at $87, because of how well its key cancer drug, Keytruda is doing? You are down almost 10% since then, because the president favored managed-care companies over drug companies. So, understand the frailty of the process and even if you are right on the company, you could be dead wrong on the market.
So don't get discouraged. It's a difficult time, not a lucrative time. I prefer bat on the shoulder and defensive hitting first. Maybe you will get hit by a pitch or walk. But home runs during earnings season? There are a lot fewer of them than you think.
CAT, C, JPM, JNJ, HON, KSS, and UNH are holdings in Jim Cramer's Action Alerts PLUS member club.