Mastering Earnings Calls and Reports: Essential Tips for Beginners

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2:50All right, folks. Welcome to Investing for Beginners podcast. Today, Andrew and I are going to take a look at earnings calls and reports. We're going to talk to you about what we look for when we are listing or reading an earnings call from two different perspectives. One, if the company is new to us, and likewise, if the company is familiar to us and how we kind of approach that. So, Andrew, let's dive in and start talking about earnings calls and what they can teach us. And maybe let's start with the basics, like what is an earnings call in a report? Why is this important to us? Companies that are regulated by the SEC, so those would be your trades on the NYSE and the NASDAQ, they have to file what's called a 10k and then they also have to file a 10q so the 10k is an annual report and it tells you what happened in the business so what the sec wants is they want they want to make sure that people aren't just uh saying whatever they want about their company and just trying to get money from investors.

4:01So the SEC, in theory, is there to protect people like us. So they require businesses to disclose certain things. And it's pretty templated, so every business has to kind of meet that standard, meet that bar of enough information where the SEC feels like investors can make a decent decision on whether they want to invest in a company or not. So things like what kind of a business overview is there, things like risk factors, things like the actual financials, what are the actual numbers behind this thing? And those have to be audited as well. So that's the 10K. The 10Q has that as well, just a little bit lighter of a version of a 10K.

4:49Not a little bit, a lot. And three of those go out a year, and then the 10K is on the fourth quarter. But those don't have to be audited. And then when it comes to earnings calls, those are actually optional because there are companies that famously opt out of doing earnings calls. So when you look at the difference between a quarterly report, which you can look at it like an 8K or a 10Q, these things that are filed to the SEC, you could kind of template that and kind of use a similar checklist. But you can't do that or you would have difficulty doing that with an earnings call because earnings calls can be all over the map.

5:31I'll give you another example. Elon Musk, at some point, I don't know if he still does this, but he had the Wall Street guys on his earnings call and then at a certain point in the earnings call, he was like, your guys' questions suck. This is really boring. Can I get anybody from the audience? I think he just took random questions from just random people. The earnings calls can be different, but the reports are pretty structured. And so with that kind of context in mind, it helps frame what I look for when I'm looking at either a 10K, a 10Q, or an earnings call. That's a great overview. Do the reports come out on a regular scheduled basis or is it just kind of random when they're going to shoot one out to us?

6:21Yeah. Yeah, I mean, they will schedule it close to the time. So you can look, what did they do in 2024? And then they won't necessarily always do it on the day after. Where you do have to, which we've talked about on the show before, where you do have to kind of pay attention to is if they have a late filing. So they'll have some timing deadline that they have to meet. They don't meet that deadline. could a lot of times where there's smoke, there's fire in those cases and in that particular case. So they do have to make a deadline, but I've noticed with majority of companies that I've looked at, it's kind of all over the map as in, okay, it's maybe it's February 14th this year, February 13th this year.

7:11A lot of times they'll be pretty good at scheduling earnings calls in advance, but I won't be able to know if it's Q1. I won't be able to know what's Q1 next year's earnings call because they just won't tell you. So you have to guesstimate a little bit and that can be frustrating or you just have to wait for a couple of weeks before when they finally schedule it. But yeah, that's definitely a frustrating part of it for sure. Yeah. Yeah. It is. It is for sure. There, there's been times when I've been looking at a company and maybe you're thinking about writing something about it, but you want to make sure that you use the air quote, most up-to-date information and maybe according to last year's schedule the company was supposed to report on september 6th like today and then you go to the company and you're like where's their quarterly report and you see in a schedule it's not coming out till the 22nd or something you're like oh my goodness so you gotta wait yeah and so yeah it's within it i think there's a a time frame that they have to do it within, but it's kind of a floating date, so to speak.

8:11So like to your point, if it was February 14th last year, it may or may not be on February 14th the next year. So just an FYI for that. I know that there are plenty of websites and especially on social media, there are places that you can go to kind of keep track of when things are going to be updated. So So you can kind of get a sense of when these are all coming. There's usually an earnings season, if you will, that starts usually with the banks, the big banks, JP Morgan, Wells Fargo, et cetera. And then it just kind of filters over the next month and a half to two months where you see the vast majority of them.

8:51And then there's Costco, which is always a lag. Right. Which is always a lag. But yeah, so the timing can be a little all over the map. But once you really get into a routine of reading them and following them fairly regularly, then you'll be able to start kind of noticing the patterns and have some sort of clue. But sometimes it is nice when you don't have 17 companies all reporting in a week and they get spread out a little bit so you can try to take the time to consume the information. The earnings calls, like Andrew said, are wildly unpredictable and depending on the company can be even more unpredictable.

9:38And two of the ones I know, there might be, I'm sure there's more, but Berkshire and Markel, correct, are the two that do not have earnings calls? I think also the, crap, there are more than just that. Yeah, there are. I guess the kind of thinking about it, Constellation Software in Canada does not do those either. And they just basically, they only release two reports a year, I think, an annual and a six month or something like that. So don't hold my feet to fire on that, but they're not very, they don't communicate a lot either. Well, they're not traded on a... No. SEC regularly the exchange.

10:18No, they're not. Yeah. Good. Very good point. Very good point. All right. So let's say that we, let's say you come across a company that's new to you that you want to start learning about. How would you approach looking at the earnings, either call or the report that you would get? What would be some things that maybe you would pick out that you'd want to learn about said company? I tend to look at the report less and the earnings call more when I'm first investigating a company because I want to fill in any gaps of knowledge that I might have at that time. You don't know what you don't know. And so ideally, if you are investigating a company and you don't know it very well, hopefully you haven't made up your mind already that you're going to buy it, which is a classic beginner mistake.

11:08but hopefully you're in this information gathering mode and you're just trying to put all the facts together so earnings call can be great for that something that i have done in the past juries out on whether this was the most efficient thing to do or not but i would look at a company a brand new company and then just have the earnings call on in the background while i'm driving around or something and then as i hear things that are interesting kind of notate it in my mind and then go back and read the transcript more intentionally to really focus on those parts that I had picked out. It can be kind of, it's more boring to listen to an earnings call than a podcast.

11:46And my daughter can attest to that because she has pointed out to me how many times it is definitely not the most polished content that you could listen to. So with that in mind, like I find myself kind of drifting in my mind a little more when I'm listening to an earnings call than something else, but there can be some benefit to that too, because it could trigger something in your head and then you start thinking about competitive advantages and you could get some deep thoughts out of that too. But I guess I take a pretty laissez-faire attitude to the earnings call. What about you? Yeah, I probably do the same thing.

12:23And I love to listen to them when I'm in the car. I also love to listen to them when I'm on walks. I find frankly, shockingly, that I learn more when I'm on a walk than when I'm driving because my attention is not distracted. I don't have to think most of the time about walking so I can concentrate on the earnings call itself. And so I will do that. I've also noticed that, well, for a company that's new to me, I will definitely listen to the whole thing. I will listen to the management commentary as well as the questions that the analyst ask because I think those in combination could be very illuminating when you're trying to learn about the company.

13:06And a lot of times, if it's something that's a little more technical, so I'll just throw out a company, CloudFlare. I don't really know much about the company. I don't really know about the tech. And I may not understand the acronyms that they're throwing around in the call. And so one of the things I'll do is I'll make notes of those. And when I get home, then I'll look them up and what is this thing they're talking about? Annual recurring revenue, what is that? Or dollar-based retention ratio, what is that? And so I'll look those things up so I have a better understanding of that. I go back and forth, honestly, on whether it's better to listen to the call or read the transcript.

13:45Sometimes I feel like I learn more about reading the transcript than I do to just listening to the call, but I think you can learn a lot from both. and so I kind of vacillate back and forth. And sometimes when I'm really feeling dangerous, I will listen to the call while reading the transcript. So I'm getting reinforcement from the words going by and that motion on the screen makes me focus more instead of drifting off and started thinking about something else while I'm listening to the call. So that's kind of what I start to listen for. I'm a big fan of listening to the tone of how management speaks.

14:28Not only the words that they say, but the tone that they speak in, as well as how they answer questions from analysts. Most of them are fairly friendly or at least neutral-ish. Occasionally, you'll run across people that are very gruff and maybe are a little more aggressive towards the analysts and how they, or even their own coworkers. And that has turned me off. I remember very vividly going on a walk and I heard, I heard some papers rustling in a background and then the CEO stopped in the middle of a sentence and said, who's doing that? Stop it now. And I was like, okay, we're out. I'm done.

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17:31Join at functionhealth.com slash beginners and use gift code BEGINNERS25. What's the best way to get started in the market? download my ebook for free at stockmarketpdf.com. So how does the process change for a company you already own then? I think for me, for a company that I already own, I'll use Visa, my time-tested company that I like to refer to. I generally will not listen to the management commentary unless I read something that is noteworthy, mostly because I don't feel like they're going to tell me anything I don't already know. And then I'll listen to the analyst calls because usually the analysts, albeit they're not generally very...

18:23I'm an overconfident investor, I guess. I don't really listen to them much. I will spend a lot of time on the front end. and then not so much on the back end. So, I mean, that keeps me out of a lot of innovative tech. And that was the path I had chosen. Well, I mean, that makes sense, right? If the majority of your portfolio is in slower-moving type businesses, then you probably don't need to stay on top as much of the companies. I'll just throw out an example. Let's say that you invest in Home Depot. You don't necessarily probably need to stay on the cutting edge of everything that Home Depot does.

19:07But maybe a company like TradeDesk, you do. Because there's so many moving parts and there's so much going on with the technology. And it's changing every day and how people react to it. And so those are things you need to be more on top of. I mean, it makes complete sense to me. Yeah. What about the 10Qs, the reports, 8Ks, the press releases? Right. How do you handle those? The press releases, most of the time I ignore completely, probably to my own detriment. I do look at the 8Ks, especially around 10K time, because you can start to see, they'll start to show maybe the whole year's worth of numbers.

19:53Maybe they aren't audited yet, but they're at least giving you a preview of what you can expect. and that can be very, very helpful. And that is actually something I picked up from you because you were the one that talked a lot about 8Ks and how much you can learn from them. Prior to that, that was not something that really entered my ecosphere much. The 10Qs, I will read them. Most of the time, it depends. So if it's a new company, I'll read the whole thing. If it's a company that I'm familiar with, let's say Microsoft, I may only read the management, the MD &A part of it and just kind of go through there and look for things that, you know, to see if they're still on track.

20:39One of the things that I've started doing is trying to take notes about things that I think are important, like KPIs that are important. And I want to hear what Satya Nadella has to say about them. Like, what is, how's the cloud doing? You know, how's, you know, AI doing? How's teams doing? You know, how are there 365 seats doing? You know, things like that that are important to that business, then I will look for those clues to see if management or IE Satya is talking about them. If he's not, then I either have to conclude that it was negligible or they're hiding something. And so that could be a, air quote, note to look for either in the 10K or earnings call or something else down the road to make sure that maybe something isn't going off the rails and the company's not telling us about it.

21:32I'm not saying Microsoft's doing that, but it's just an example of what I will try to look for. That's a really, really good nugget. You'd be surprised how often that happens once you start kind of noticing it. And you're like, oh, interesting. The rest of the report looks kind of bad. And oh, would you look at that? that KPI kind of disappeared. Right. So it can, I think it is, it's a great yellow flag signal. Yeah. Yeah, for sure. For sure. I know recently Netflix stopped reporting number of subscribers and I think that one was pretty obvious, but sometimes the companies will, there will be something that they talk about regularly and then all of a sudden it disappears.

22:14I remember specifically PayPal was talking all about how many, how many users of the platform they had. and then all of a sudden they stopped. I'm like, what happened? Why did they stop reporting that? And then the next earnings call, the analysts, like not everyone, but pretty close to everyone was like, where'd that go? Why aren't you talking about this anymore? And then management kind of stumbled over that and that was kind of the start of the demise of the company as far as like the stock price at that point because people felt like they're hiding something from investors. Yeah. Yeah. Interesting.

22:52That's probably countless examples, right? Oh yeah, for sure. Yeah, for sure. So what, like when you're thinking about like the kind of the information that you can gather from these, these reports, like how much weight do you put on them? I know you said you're, you're not always current on the reading of them, but if you are paying attention to it, like how much weight does that carry with you? Is it negligible? It's like, okay, let's throw out a hypothetical. Let's say you're looking at a company and some bad news comes out about the report. How do you handle that? How does that enter the brain in the process?

23:41I find it hard to answer that one. I'm curious how you handle it though. To date, it has never caused me to sell. Whether that continues or not, I don't know, but probably not. Generally, if I hear bad news about something, so to go back to PayPal's example, when I noticed that in the earnings report and then I heard it in the earnings call, that certainly was a red flag. And so it was something that I made a note of. And so when the next earnings release came about, I wanted to see, A, how management handled that, and B, whether any analysts continued asking questions about that. And I noticed that management did address it in their opening remarks, pretty much from the get-go.

24:34And they tried to kind of talk everybody off the ledge, so to speak. Like basically they were saying that they were changing, they were kind of doing a pivot on their business model and how they were thinking about what was best for the company and shareholders and information and yada yada. And I think one or two analysts asked them questions about it, but it was pretty minimal. But it felt like the answer was a little too late. and it felt more like a PR response after something bad happens as opposed to a heartfelt like, yeah, we screwed up. We should have communicated this earlier. Here's what we're going to do now going forward.

25:19It didn't ring true. So that, again, added another red flag, and that's when I started seriously considering bailing from the company. and it took me a little while before I actually ended up reducing my shares, the position. I still own a very small amount of it, but at the time it was very troubling. And then when you started to see the financial performance suffer, then it was just kind of icing on the cake. Okay. All the things I was worried about are starting to show up in the financials. It's probably time to make a change. So in that respect, it definitely had an impact, but it wasn't an immediate sell.

26:06And so usually when I listen to this stuff or it's a company that I already kind of know, then I will make notes of something, anything that stands out and try to refer back to those when I'm listening to the next earnings call or if I'm reading something about the business. I won't speak for you, but I know when you read a lot about the company and you spend a lot of time learning about the business and then you own it and you're kind of refreshing yourself every so often about the business, sometimes I feel like my eyes can gloss over the words. And I read the words like my eyes read them, but my brain doesn't necessarily connect all the time.

26:51and so for me I find that if I have these little notes I use google keep now and I make little notes of the companies and things in the companies I put dates on them and so when I am listening to FICO and their earnings call I don't own the company but when I'm listening to their stuff I may go back I'll go back and look at those notes and go okay did they talk about this did they talk about this did they talk about this and I will admit I will use the ctrl f function sometimes if I'm in a hurry. And I'll use that to scan through either the 10Q or the transcript to see if there's any information about those kinds of things.

27:30So it could be helpful to scan the things that I feel like are important without having to listen to some of the gobble goop that they'll spit at you. This episode is brought to you by Accenture. When your advertising operations fall out of sync, everything else follows. Spotify and Accenture are working together to reinvent the rhythm of ad sales. Using automation, analytics, and smarter workflows to simplify campaign delivery and access better data across the business. The result? Less time spent on operations, more time connecting brands with the moments and fandoms that matter most. Learn more at Accenture.com slash Spotify.

28:09Right now, get up to 15 % off select storage solutions. Put heavy-duty HDX totes to good use, protecting what's important to you. The solid, impact-resistant design prevents cracking, and the clear base and sides make items easy to find even when the totes are stacked. Find select shelving and tote storage up to 15 % off at the Home Depot to organize every room in your home, from your garage to your attic. Visit homedepot.com, how doers get more done. Yeah, let's talk about tools. So hang on a minute, the Google Keep? What is that? Never heard of that. uh it's steven our friend steven who works with us he he's the one who clued me in on this so i used to use evernote as my note keeping device and now i since we use google for just about everything yes the overlords we are fans they they they have this note keeping app and it's you know if you if you have google if you have the google products suite it's called google keep and it's similar to something like notion or evernote all it's not as robust as those are by any stretch but it's a real good place to keep notes of things and you can make your own categories and you can keep track of you know for example i have one that just says stock research and under that i have all the little notes that i've kept about companies that i've either been interested in or own or have found something I want to remember about it.