Do Investors Put Too Much Into Earnings?
It is that time of year again. Earnings. Some of us run. Some of us hide. Some of strap in and hang on for the ride. If you're lucky, you have enough investing wisdom to pick some good stocks, but even the best companies have bad quarters. After dismal showings by some of my holdings and some of the stocks that populate my watchlist I started thinking, "Hey, maybe earnings aren't everything.". So why do we like earnings in the first place? They're one of the few pieces of tangible evidence we have to gauge our investments. Just like in sports, potential doesn't add up to much if you can't keep a decent balance sheet (ask JaMarcus Russell).
But then again, just like everything else in our society an culture, there should be exceptions to missed earnings. Look at ClearWire (CLWR) - a company with exceptionally large spectrum holdings that is in the process of rolling out the nation's largest 4G network - for example. Sure, they missed earnings (if you can call -$0.61 a share earnings). But look at the OTHER numbers they posted. Analysts expected them to add 377,000 customers. They added 722,000! Analysts expected them to cover 2 million people by year's end. They expect 3 million. In just the last few weeks they added retailers such as BestBuy and Cbeyond, expanded to Jacksonville and Grand Rapids, and released the iSpot for Apple users. Potential, due to their spectral band holdings, is the only thing keeping this stock afloat. Their LTE trials might not go so well and manufacturers might be reluctant to sell dual-band phones (phones that use WiMax and LTE), but they can sell their spectra for a few billion. Risk is omipresent, but the gains could be worth it.
Neutral Tandem (TNDM) is another example. They have, ahem, a slightly better balance sheet than CLWR. Actually, its nearly immaculate. TNDM barely missed an earnings report (yes, they actually earned money ^see above), their 3rd in a row, but that doesn't warrant a 20% drop in one day, which happend after Q1 as well. Their billable minutes increased, but the price per minute dropped. This is true for the entire industry though, so it takes the wind out of the sails of the "their competitors are gaining ground" argument. TNDM has an infastructure in place (CLWR too) - an edge over competitors. TNDM (CLWR too) got out of the starting gates much sooner than their rivals, so its only natural that someone is finally gaining ground as TNDM's growth has slowed. Many Fools would agree that TNDM is a bargain.
And then there's a company called Humana (HUM). Well I just had to round out my argument - to be fair and balanced. They wrecked earnings and the stock jumped. Expected.
So Fools, what do YOU think? Is too much weight given to earnings? Do some stocks get a hall pass? Are analysts the ones to blame? I'm looking forward to your thoughts and comments. 'Til then, Fool on!