Ah, April. April is a glorious month, especially if you love rain storms and budding trees. Is there any month sweeter than April? I mean other than May.
In investing, April offers something more. Every April, first-quarter earnings fireworks -- grand, average, or duds -- arc above Wall Street and cast either a happy glow or a concerned pall over investors. The last two years, despite nice weather, April has put Wall Street under gray skies.
In fact, almost every quarter since mid-2000, a majority of companies have fallen short of earnings expectations, been more cautious about the future, and guided earnings downward.
With any luck, however, that may have started to change as of January this year. Sure, the stock market took its lumps in January when companies as strong as Intel (Nasdaq: INTC) didn't see a recovery on the horizon, but most companies in January at least came close to earnings estimates. This indicates that the big slide in the economy may finally be easing -- at least enough so that quarterly expectations have finally caught up (or down) with the economy.
Under this scenario, quarterly results could finally begin to improve in that they'll at least match expectations.
But even as I write this, should we care? Isn't the obsession that Wall Street has with quarterly earnings per share estimates downright, well... unhealthy? Do long-term investors need to fret about how a giant like Johnson & Johnson (NYSE: JNJ) performs every three months? And if this giant misses estimates by a penny or two, should the stock fall 15%? Isn't that an overreaction? (Every time in the past the answer has been yes.)
So, how much should quarterly results matter to long-term investors? [Enough with the question marks, genius. OK. One more.]
How important are quarterly results?
For many investors, quarterly earnings reports shouldn't matter much at all. If you're investing in the S&P 500 index fund for the next decade, you needn't consider quarterly earnings. There's little point when you're so diversified and when you admit that nobody can "time" the market.
Once you invest in individual stocks, however, you'll want to follow each business that you own closely enough to understand it and keep current on its performance.
Yet, companies that are decades old -- such as J&J, PepsiCo (NYSE: PEP), and Mellon Financial (NYSE: MEL) -- can usually be allowed to go a year between each checkup if you prefer. It's the younger companies that haven't proven their staying power or that compete in quickly changing industries -- such as technology investments -- that should be followed all the time. In these cases, quarterly results should be analyzed for progress and any warning signs.
Lucent (NYSE: LU), even though it was a giant, is a good example. It operates in a highly competitive industry, so it should be watched at least quarterly. When Lucent started losing sales, you could see its inventory and accounts receivables rise sharply a few quarters before the stock imploded.
What's a good ground rule?
Overall, your knowledge and your comfort level with an investment should dictate how closely you follow its results -- whether you comb over all three financial statements each quarter, simply browse the earnings press release for key points and financial metrics every six months, or really dig in just once a year.
In your mind, you should already know which discipline you need to use with each of your investments.
Whatever you do, don't be complacent for too long. As with your health, we suggest that you conduct a full annual checkup on each of your stock investments, analyzing the balance sheet, cash flow statement, income statement, and the Securities and Exchange Commission (SEC) filings. You should only own enough stocks (about 8 to 15) that you can comfortably do this for every year. And if you don't know how to read financial statements, learn how. Otherwise, you should consider an index fund instead of buying individual stocks.
Summary of suggestions
You should closely study results every quarter for companies you own that are:
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In highly competitive industries
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In quickly changing industries
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Unprofitable and burning cash
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Highly leveraged with debt
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That have recently entered new businesses or restructured
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That have recently changed management
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That haven't already proven themselves over at least two decades
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That you're not extremely comfortable owning (you might need to sell then!)
In contrast, giant profitable companies that you've owned and known for several years, that are predictable and established, that operate in slow-changing industries and aren't under new competitive threats, can typically be allowed to skate a few quarters now and again (if large news doesn't arise and if you're comfortable doing so), as long as you conduct a full checkup every year.
First-quarter Drip Port expectations
Many of the Drip Port's companies report earnings in the next two weeks. Most of our companies, if not all, can be considered well-established and fairly predictable. Here are links to sales and earnings expectations:
Fool on for the long run.
Jeff Fischer is on leave (this column was written a few months ago) so he won't be closely checking this quarter's results for most of his companies. His profile shows what he owns. The Fool has a disclosure policy.
