I recently heard an idea that I kind of like.
In a meeting with President Trump, Pepsi Co. CEO Indra Nooyi proposed that publicly-traded companies move from reporting earnings results each quarter to announcing them just twice per-year.
I had never really considered this, but it makes some sense. Earnings season is important for the simple fact that it is a corporation's duty to inform investors of what is going on -- both good and bad. Shareholders who invest in these companies have the right to know.
But do we need to be updated every three months?
Reducing the number of times companies release results will drive down corporate costs. More importantly, it will allow companies to focus more time on conducting business and less time on crafting an earnings call narrative to explain their latest results and future projections.
Besides, certain performance measures that used to carry meaning seem to matter less each year. For example, investors have grown to ignore whether a business meets, exceeds or falls short of analyst estimates. They want to know what lies ahead more than what happened. Investors care more about whether a business sees its sales numbers increasing in the future than they do about whether the business met its sales expectations for the prior quarter.
To that end, earnings announcements always seem to boil down to a few key insights:
- Will sales increase or decrease in the upcoming year?
- Are you expanding your market share via customers, users, regions, etc.?
- Are they any major announcements? Such as shutting down a product line or delving into a new market.
- How have certain business development decisions performed? For instance, if the business recently acquired another company, how has the acquisition worked out so far?
Earnings calls contain a lot of excess noise. In reality, investors usually react to a couple key nuggets of data.
One of the chief arguments in favor of moving to a bi-annual earnings calendar is that it will lessen the volatility that stock prices endure around the time they release results. I am not so sure. It might only displace that volatility by increasing the amount of price movement that occurs around those two earnings announcements.
Without knowing more, I think I would be in favor of this change. We will see how it develops in the coming months.
In The Market...
The S&P 500 gained +0.7% last week. Let's look under the hood:
It took 8 months but the stock market finally reached new highs. When including dividends, the S&P 500 eclipsed the weekly closing high from January. Take a look:
Time will tell whether this holds and stock prices break through to higher levels. It is important to emphasize that these highs are on a dividend-inclusive basis. Excluding dividends, the S&P still has a bit of work left. However, we typically like to include dividends when showing the S&P 500 because dividends are part of an investor's returns. Market momentum is pretty good heading into this week, which means we could see further highs sooner than later. Technology, Health Care and Utilities look to be the healthiest sectors.
Most sectors were positive last week. The dividend-paying sectors -- Utilities, Consumer Staples and Real Estate -- were the big winners. Energy was the only real loser, falling -3.6%.
Bond values gained as well (rates lower) as it appears the bond market has stabilized in the past few weeks. We might even get a run of lower interest rates in the near future. That would be good news for bond investors and is something we are keeping an eye on, although our bond allocations are already fully invested in Preferred Stock (PGF), High-Yield bonds (SHYG) and Municipal bonds (PZA). A potential move would be to sell one of these positions and invest in either Investment Grade bonds or Treasury bonds.
In Our Portfolios...
What's New With Us?
I am thrilled to share that Josh Baird passed his Series 65 exam last week! It is a great accomplishment and will bolster his ability to contribute even more to our firm. Josh has been an excellent addition to our team in the short months he has been here.
Have a great week,
Brian E. Betz, CFP®