My 'Secret Sauce' for Earnings Analysis

At the start of the month, we examined the first installment of our earnings report card for large-cap companies, looking at how the earnings reports so far were coming in -- who was beating, who was whiffing and why. An earnings surprise performance can be highly indicative of how a stock will perform in subsequent weeks, so this exercise is an important way of gauging market sentiment, the direction of earnings, and simply who is hot and who is not going into the new year.

We are approaching the end of fourth-quarter earnings seasons, for the large-caps, anyway, with 87% of the S&P 500 reporting. (Note that many small-caps will be reporting through March, so we will wrap up the Russell 2000 report card in a week or two. Also, some of the large-caps have fiscal years shifted by one month, so they have not yet reported the quarter that ended Jan. 31.) As I look at the results, my "secret sauce" is to compare actual earnings per share not to the consensus at the report date, but to the consensus six to eight weeks earlier. This enables us to filter out the noise of last-minute adjustments to expectations. A company that beats by a couple of pennies after lowering guidance meaningfully from earlier in the quarter cannot be credited with a beat, sorry....235 more words left in this article. To read them, just click below and try Real Money FREE for 14 days.

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