Company Signs to Watch for Ahead of Earnings

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Changes in reporting dates and subtle shifts in tone can convey whether good or bad news is coming.

What if you could anticipate stock price movements without ever opening an annual report or reading any analyst opinions?

Wall Street Horizon, a leading provider of corporate event data, says you can. All you need to understand is how to read "corporate body language."

The same way you know it's time to find a restroom when your toddler starts the potty dance, you can tell a lot about a company based on its actions around key events and dates. "Companies have personalities just like people have personalities," says Wall Street Horizon founder and chief executive officer Barry Star. They give unspoken cues that something big is about to happen when they deviate from the norm.

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Once you're familiar with a company's personality and know what cues to look for, you can use these signals to anticipate stock market movements and increase your return. This is particularly important during earnings season, when some companies may send subtle signals ahead of any announcements that might alert you to the potential for a market bump or a market pounding.

Watch for these corporate moves. The most recognizable signals are earnings dates that move forward or backward on the calendar and changes in the location of shareholder meetings. "You can glean information by watching how these events move just like you can learn a lot about somebody without them ever opening their mouth," Star says.

Take earnings dates, for example. A company moving its earnings release date forward on the calendar is often a bullish sign for the stock. "It's plain old Human Behavior 101," Star says. "If you have good news you want to tell everybody."

And if you have bad news, you're probably not going to rush to the podium to announce it. You may even decide to break the news somewhere far away. "If I have bad news, why would I want to announce it in front of the home team?" Star says. If a company moves its shareholder meeting from its hometown to halfway across the country, it's generally a bad sign.

Travis Johnson of the University of Texas at Austin McCombs School of Business and Eric So of MIT Sloan School of Management call these corporate earnings date movements "dating games." Their research, published in the Journal of Financial and Quantitative Analysis, finds that firms that advance their earnings dates typically report better earnings than those that delay their announcements.

What's more, they find "advancers" outperformed delayers by more than 2.6 percent and the broader market by 1.3 percent in the month following the announcement. Meanwhile, delayers underperformed the broader market by 1.3 percent.

Alas, nothing in investing is absolute. "This works in the aggregate," Star says. It may be true 80 percent of the time, "but 80 percent of the time means one in five is going to be wrong."

Take Procter & Gamble Co. (ticker: PG), for example, says Martin Jarzebowski, vice president and portfolio manager for Pittsburgh-based Federated Investors. The company moved its last earnings call one day ahead. According to Wall Street Horizon, this should be a bullish sign for the stock.

But Procter & Gamble made the move to announce the acquisition of German Merck KGaA's consumer health business and weak operating trends. "The stock subsequently underperformed after digesting the new information," Jarzebowski says. "Gauging stock reaction when management moves their reporting schedule is difficult to predict." In reality, the only certainty is volatility.

Research by the Kellogg School of Management finds that the stock of companies that announced earnings outside of regular trading hours were more volatile for at least three trading days following the announcement.

Since investors can't know which way a stock price will swing, Jarzebowski suggests using an options strategy to hedge your bet. "By using options, investors can profit from the increased level of absolute volatility around the earnings event regardless of stock direction," he says.

For example, with a straddle, or the purchase of a call and put option at the same strike price on the same stock, one side of the strategy is profitable whichever way the price moves. If the stock price falls, the put option gives you the right to sell your shares for a higher price. If the prices rises, you can exercise the call option to buy shares at a discount and then resell them.

Using a straddle on a stock with earnings announcements before the bell increases average daily returns 0.36 percent, or 1.44 percent over four days and 131.4 percent annualized, according to Kellogg School of Management research.

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Listen for changes in management's tone and language. For the long-term investor, volatility from corporate body language may be nothing more than a bump in the road. "The bad news is going to happen, and it's going to negatively impact the company" regardless of when it's announced, says Ethan Rouen, an assistant professor of business administration at Harvard Business School.

A greater concern for long-term investors is a CEO's willingness to play games to muffle the impact of bad news. "The CEO is a shareholder, too, and we want [him] to be a long-term shareholder," Rouen says. "We don't want the CEO to care about shaving a couple percentage points off a stock move in the short term for something that's an inevitability anyway."

Deceptive CEOs and CFOs can cost investors 4 to 11 percent per year, according to research by David F. Larker of the Stanford Graduate School of Business and Anastasia A. Zakolyukina of the University of Chicago Booth School of Business. "Identifying deviations in management tone can help an investor evaluate key fundamental changes," Jarzebowski says.

For example, Philip Morris International (PM) management recently used the word "plateaued" to describe slower-than-anticipated growth in a new product after previously using much more confident language. "The change in tone in such a short time led many analysts to decrease their future growth expectations for this important new product cycle," Jarzebowski says.

During their analysis of company earnings calls, Larker and Zakolyukina identified several common speech patterns deceptive CEOs and CFOs use:

  • More references to general knowledge, such as "you know," "investors well know" and "others know"
  • Fewer non-extreme positive words, such as "nice," "accept" and "love"
  • Fewer references to shareholder value

In addition, deceptive CEOs use more enthusiastic words (for example, "fantastic," "great" and "definitely") and fewer words associated with anxiety ("fearful," "nervous" and "worried").

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Meanwhile deceptive CFOs use more negatives ("no," "not" and "never") and harsh words ("absurd," "adverse" and "awful"). They also make fewer references to themselves, avoid impersonal pronouns ("it," "anyone" or "nobody") and swear more.