Earnings results from the third quarter (Q3) started coming in last week, with more expected in the coming weeks…
Earnings season is when public companies report their quarterly financial results. And it’s one of the most critical times of the year for investors.
Companies file earnings reports with the SEC and make a public announcement through an official press release, which is typically followed by a conference call with investors and analysts.
Frank covered the Q3 kickoff in a recent episode of Wall Street Unplugged… “You get an amazing outlook on what’s going on around the world listening to certain companies.”
If you tend to ignore earnings reports, you’re not alone. They can be tedious. But they can give investors a critical leg up… especially heading into an election.
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Today, I’ll break down what earnings season is all about… and the Q3 reports of three companies that illustrate what you can learn from their guidance. It may surprise you…
What is earnings season?
Earnings season occurs at the beginning of January, April, July, and October for most companies.
Earnings reports are filings that declare a company’s revenue and earnings figures. Quarterly reports cover the past three months, providing shorter-term insight. Annual reports cover the past 12 months, providing longer-term insight.
Companies are required to file earnings reports no later than 35 days after the end of their first three quarters, and both quarterly and annual reports no more than 60 days after their fiscal year ends.
These reports not only let investors and potential investors know how companies have been performing financially, they provide guidance on how management expects the company to perform over the near term.
Guidance from most companies is relatively accurate… but keep in mind that some companies will be conservative or overly optimistic.
Investors can access earnings results on a company’s website, SEC.gov, and in other publications. While there’s no legal requirement for a company to conduct an earnings conference call, many large companies do.
Why investors should pay attention
The main reason for investors to pay attention to an earnings report is obvious: to know how healthy the company is financially. The report can provide crucial information on a company’s income and expenses, which may indicate a company’s future stock performance.
Typically, when companies post strong results, their prices are driven higher, and when companies post weak earnings, their stocks prices plummet.
Investors can listen to a company’s earnings conference call, or read a transcript of it. On the call, the company’s leadership give updates on the industry outlook and provide guidance for the upcoming quarter.
Earnings reports also provide insight into the growth of a company. If you buy a stock based on its growth potential, but its revenue growth is faltering, or the industry outlook doesn’t look promising, that would be a good reason to sell.
But there are reasons to pay attention beyond how a particular stock may perform…
Current guidance for TSM, HAL, LMT
As Frank mentioned, it’s especially important to hear what companies have to say as we head into the November 3 election. That’s because the winner’s policies could have an effect on the revenue potential of companies in various industries. If a company’s management believes the election’s results will factor into its near future, it’s vital for investors to know.
Below you’ll find guidance from three earnings reports Frank covered in Wall Street Unplugged. Frank was interested in hearing what Taiwan Semiconductor had to say due to tensions between China and the U.S. and how that would affect chip sales. Halliburton’s report is an indicator of energy demand in the U.S. and abroad, and what it believes will happen with fracking. Frank was also curious to see if defense companies were worried about spending being impacted by the election.
In sum, these reports are good indicators of what’s going on in China, the rest of Asia, and Europe… whether you should be investing in the energy sector right now… and how the defense industry may perform in a Democratic or Republican administration.
Taiwan Semiconductor Manufacturing Company (TSM)
TSM is one of the largest manufacturers of chips in the world. The company announced earnings on October 15: Revenue was up 29.2% and earnings per share was up 35.9%. Sales were driven by rising order volumes from companies that make Internet of Things (IoT) devices, high-performance computing chips, and 5G smartphones.
The firm also provided positive guidance for Q4, as 5G and HPC should continue to drive growth. Management says that demand for 5G phone chips is currently booming at smartphone vendors. Mobile customers are buying a ton of 5G chips, due to worries about supply constraints to meet 5G demand. TSM is expecting revenue in the range of $12.4–12.7 billion in Q4.
Halliburton is the world’s second-largest oilfield-services company. While energy has been a losing sector this year, listening to the company’s management can provide guidance on where the market may be headed in the near term. Fracking insight is crucial here, since this is where the election will most likely dictate future profit potential.
The company released its earnings report on Monday, October 19. Earnings beat the consensus estimate, while sales missed due to the coronavirus-induced drop in oil demand. Management sees the demand recovery starting to unfold, but the pace and magnitude of this recovery will vary by geography and customer type.
Halliburton CEO Jeff Miller believes the market is nearing a bottom… and the next decade should be more profitable for the company. He also mentioned that 30% of hydraulic fracturing equipment has been permanently retired, noting that consolidation is great for the company.
Lockheed Martin (LMT)
Lockheed Martin is the largest defense contractor in the world, and there are concerns of reduced revenues if Joe Biden wins the election. The company announced earnings Wednesday, October 21 and beat both top and bottom-line estimates for Q3. Revenue rose 8.8% year over year to $16.5 billion.
The company also increased its fiscal year 2020 guidance and expects to earn $24.45 per share on revenue of $65.25 billion. Management also said that sales should equal or exceed $67 billion in 2021, compared to a $66.4 billion consensus. As for election concerns, this may be unwarranted based on Lockheed’s updated guidance for next year. Both Democratic and Republican administrations have supported large defense budgets.
From reading the transcripts of these three companies, we learned from Taiwan Semiconductor that demand for 5G phone chips is booming and the tensions between the U.S. and China is not affecting the purchase of 5G chips.
We learned from Halliburton that demand for energy is starting to recover… and the company is bullish on fracking due to industry consolidation.
We also learned from Lockheed Martin’s updated bullish guidance that the election should not have an effect on the defense industry.
5G has been one of the hottest trends this year and is likely to continue for the foreseeable future. Adding a stock such as Taiwan Semiconductor—or another firm benefiting from this trend—could help add growth to your portfolio.
If you’re looking for a more conservative holding, consider Lockheed Martin, as defense spending isn’t likely to drop any time soon.
Finally, even though Halliburton is upbeat in its guidance, I would avoid the energy sector for now, as I don’t see things turning around until we can get control of this pandemic.
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