TESS VIGELAND: Ah yes, that may be true, but here at Marketplace Money, summer school’s in session.
This week, we’re looking at Wall Street’s quarterly report card, also known as earnings. But they’re not exactly like the report cards you brought home from school back in the day. The Marketplace Players present this dramatization of how even how even the best corporate earnings can prompt a stock to tank.
SON: Hey Mom! Dad! It’s report card day!
MOM: Well, it must be good news!
DAD: Let’s see here. Straight A’s?
MOM: You’re grounded!
DAD: You think you’re getting into Harvard with grades like these? Put some pluses next to those A’s, then we’ll talk.
SON: But this is enough to get me a scholarship to Berkeley!
DAD: Berkeley?! You call that a school?!
SON: No matter what I do, it’s never enough.
MOM: Is it wrong to have high expectations for you?
DAD: Look what you’re doing to your mother. Go to your room!
SON: You’re tearing me apart!
DAD: I said go!
MOM: I don’t have a son!
VIGELAND: And now, for a real definition. At the blackboard today, economist Chris Low.
CHRIS LOW: Earnings are the profit made by a company and they’re reported in an individual quarter. It’s the way we keep track of how well a company is doing. After all, in a capitalist system, profits are the bottom line. It’s the ultimate measure of success.
The difference between actual reported earnings and expected earnings is in fact probably the most important thing from an investor’s point of you. And the reason is that earnings are only reported once a quarter. Which means for the rest of that three-month period, investors are buying and selling the stock in anticipation of future earnings. As those future earnings are reported, we compare them to what was expected. If they fall short, then the stock is going to sell off and will readjust. If, on the other hand, they out-perform, well then the stock’s probably going to go up.
As an investor, it’s probably a good idea not to worry too much if earnings are slightly off of expectations. A penny up or a penny down isn’t going to make a big difference in the long run. It’s probably more important to go through earnings reports, listen to investor conference calls and try and judge whether there’s future for the company, whether the prospects for earnings in the future is positive, and also whether the excuses — because there always will be excuses — are good ones when a company falls short.
TESS VIGELAND: Our teacher this week was Chris Low. He’s the chief economist with FTN Financial in New York. Next week, we go house shopping and ask, “What exactly is PMI?”
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