As investors grow more familiar with the companies in their portfolios, there's a few times a year that build near Christmas-like anticipation: earnings season.
Companies typically report their earnings quarterly. Since they have to get their financial statements audited, checked, and re-checked, there's a slight lag between the end of the quarter (generally the last day of the months of March, June, September, and December) and when earnings are actually reported, so they typically are announced in April, July, October, and January. This is not to say that all companies report during these periods; companies can make up their own fiscal quarters and years if they wish.
Public company earnings are reported, well, publicly. The company CEO or other top management will hold a conference call with investment bankers and institutional investors, and tell them everything the company sold and earned during the quarter. Bankers and investors can ask questions on the call, which can get intense if the company delivers bad news. Retail investors like yourselves can listen to these calls as well, as they might linked to the company's stock listing on Google Finance.
Traditionally, Alcoa, the aluminum producer, is the first company to report, kicking off earnings season for public companies. Investment analysts cling to the company's every word, as they believe that a pattern in Alcoa's reporting may be repeated by other companies, even if they're in a different industry. For example, if Alcoa's earnings go down, and the decline is related to a slowing in construction of homes, analysts can extrapolate that other parts of the economy might slow down, too, from related industries like home improvement retailers (such as Home Depot) or seemingly unrelated ones like PepsiCo (can't forget what sodas come in!).
To that end, earnings season also gives investors an idea of the condition of the overall economy. If companies' earnings are falling across the board, it is likely a sign that consumers are not spending, probably because they can't afford to. If earnings are growing, then the economy is likely on a good curve, going up.
Investors also use a company's earnings announcements to try to predict what's to come in the company's future. For example, Apple's third quarter earnings were announced last week, on July 23. (Click here if you don't have Wall Street Journal access.) The company announced that sales of the iPhone had grown 20% over the past year, but iPad sales dropped 14%. Revenue was basically flat and profits declined 22%. From this information, investors might gather that Apple -- historically an extremely innovative company -- may be losing its edge, especially to competitors like Samsung. Investors show displeasure with earnings results by selling the company's stock, but they didn't sell off Apple very much, showing that they still believe the company can recover.
One thing to note during earnings reports is source, and quality, of earnings. The best reports come from increases in revenues, which lead to increases in net income (profit, or earnings). What we're seeing now overall is companies whose revenues are staying the same, but profits are increasing. This is still good, but could be better. The increase in profits here is coming from decreases in expenses; companies may be cutting back on spending on supplies or even salaries (layoffs!) to save money. This will result in an increase in earnings, but investors want to see growth, not just cost cutting.
While it's not good to obsess or make snap judgments based on one earning's report, I believe that retail investors should pay attention to these announcements and listen to the calls, if possible. If anything, they're a great way to learn more about the company, the closest to an insider's view many of us will ever get. But remember to keep the big picture in the mind: what's going on with the company's competitors? What's going on with the overall economy? In times like these, those questions -- especially the latter -- matter more than anything.
Sunday, July 28, 2013
Saturday, July 13, 2013
"Invest in us...Because you're worth it": Alternative Investments
Given the Security and Exchange Commission’s ruling this week
that allows hedge funds and the like to advertise publicly, I can’t think of a
better time to shine some light on what are known as alternative investments.
Alternative investments are called that because, well, they are
alternatives to investing in regular stocks and bonds. Some of the most popular
alternative investments include hedge funds, private equity funds, and venture
capital funds.
Hedge funds
are basically mutual funds for the ridiculously wealthy. A hedge fund pools
money from different people or institutions, and invests in stocks on their
behalf, but the fund doesn’t typically invest the way a mutual fund would. A
hedge fund will invest in derivatives or sell stocks short,
for example.
Private equity funds are similar to hedge funds in that they pool money
from wealthy people and institutions, but these funds don’t buy or sell stocks
that trade on the public markets. They buy whole businesses, sometimes by
buying that company’s stock (which is known as “going private”)
or buying it from its previous owners. Private equity funds generally invest in
businesses with the intention of making them more efficient; after several years,
the fund usually sells the company again, hopefully for a significant profit.
Private equity was talked about which a lot during the 2012 U.S. presidential election, as one of the candidates used to work for a large PE firm. Commercials featuring disgruntled employees he had “fired” from the companies riddled the airwaves. My personal opinion is that the attacks on the PE industry were unfounded and the candidate’s work was taken out of context. Rest assured that PE is not evil; it is very complex, but it is not bad.
Finally, there’s venture capital.
If you watch the ABC show Shark Tank,
you’re already familiar with the concept. Venture capital also pools money from
wealthy investors, but these funds invest in companies that are babies, also
known as start-ups. VC, as it’s known, is widely considered the riskiest of
alternatives because the investments are in companies that are so unsure; many
have not even made a profit yet. But the upside is that you can help an entrepreneur
fulfill a lifelong dream that may be the next Google or Facebook.
All of these investments could potentially make you A LOT of money. But
you know the drill: with high reward comes high risk. These investments are
certainly more risky than buying Treasuries, and are generally more risky than
investing in a stock index fund. BUT, there are a few other stipulations that
make these investments even more out of reach:
- The minimum investment for these funds is typically
$250,000 to $1 million, sometimes more.
-
The fund managers generally get a 20% cut of the
profit AND you have to pay about 2% per year to help them run the fund.
-
Only “accredited” investors
can play in the sandbox anyway.
That being said, if you start to see ads for alternative investments,
most of us can only do just that: watch. But for those who could afford to
play, be cautious, as with any investment, and know what you’re getting
yourself into.
Friday, July 5, 2013
Mutual Fun(d) Decisions: Part 3, IRA What?
Happy
[belated] 4th of July, Readers!
In honor of Independence Day, today, we’ll take a reader question, one that I’m sure more than one person out there has:
In honor of Independence Day, today, we’ll take a reader question, one that I’m sure more than one person out there has:
Dear Stock
Market Chic,
Thank you so
much for the great insights! My investing life will never be the same! Anyway,
I know you’ve talked in previous posts about 401Ks, but I’ve also heard of IRAs
and Roth IRAs. What’s the difference?
Signed,
IRA, what?
Dear IRA,
Thanks for
your question! With so many different investment account acronyms out there, it
can be confusing to get them all sorted, so it’s a great question.
A 401K is a
retirement savings account sponsored by your employer. Money may be taken from
your paycheck pre-tax to help fund it, and the percentage you want to
contribute is typically up to you. Some employers require a certain amount;
others don’t. Either way, you should save as much as you can. Generally, your
employer will match your savings with a certain percentage contribution, too,
but those funds may be off limits until the “vesting period” is over; that is,
you might have to stay with your employer for a certain amount of time in order
to actually get their end of the contribution.
There are limits to how much you
can contribute in a year, though. The
cut-off varies year to year, but is normally somewhere between $15,000 and$17,000, which is a lot to set aside anyway. You decide how to invest your 401K assets,
and none of it is taxed until you take it out of the account. BUT there is a 10%
penalty tax if you take the money out of the account before you’re 59 ½ years
old, on top of the income tax you’d get socked with (there are some legitimate
reasons to not get penalized, though, but they are few and far between). So, to
that end, leave your 401K there until you’re ready to retire, or roll it over
into an IRA.
An IRA, or
individual retirement account, is another type of retirement savings account,
but is not associated with an employer. You can open an IRA at your local bank
or credit union. This account is commonly known as a “traditional” IRA, as
opposed to a Roth, which we’ll discuss in the next section. The biggest thing
to know about traditional IRAs is that they are tax deferred, so you don’t pay
any tax on contributions now, but you will when you withdrawal the funds during
retirement.
Let’s say
you have a 401K at your current job, but you plan to change jobs soon. You can
either keep the 401K where it is or you can roll it over into an IRA. The
latter option allows you to keep contributing to it, tax-deferred. The more you
can shove into a traditional IRA or 401K now, the lower your taxable income
will be, but contribution limits are considerably lower for IRAs, so don’t
think you’re getting over on the IRS. In 2013, it’s $5,500 ($6,500 if you’re
over 50).
A Roth IRA is
almost the exact same thing as a traditional IRA, except that you contribute to
it with after-tax income. Since you’re paying The Man now, you don’t have to
pay him in the future! You might still be subject to a penalty when you
withdrawal the funds, though, depending on your reason for taking the money
out.
That said,
there are strict income limits on Roth contributions, but most people qualify
easily. Maximum contribution also has a bit of a low ceiling, at $5,000, but
you can contribute to a Roth even after you’re retired.
I hope that
clears things up a bit! I’m happy to take more questions!
Wishing you
rich returns,
Vonetta
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