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So I hear a lot of people asking, “Do you have any idea why the current markets are flying so high while the economy is down in the dumps? I look at the stock market and see that it just keeps going up. Am I missing out? What gives?”
We're gonna give you the straight, no-BS answer right now: the stock market is forward looking.
Sorry if you thought I had some super secret elaborate response to your question. The thing is, there are 3 key things that smart investors look out for when investing in the stock market that will help you make better decisions and ultimately much more money in the long run.
1. Guidance
Markets being forward looking is quite logical when you think about it. The whole reason why people invest in the first place is because they anticipate growth in the FUTURE. Not NOW. That’s really the core motivation for any kind of investment whether it’s short term or long term. Great investors look at future growth. I’m pretty sure people aren’t going to buy a stock if they think the company’s going to do poorly in the future. How do we know this to be the case? The first tip of researching a stock and their future growth is to look at their GUIDANCE. Earnings guidance is a company’s forecast of where the following quarters earnings per share will end up at.
When you buy stock in a company and their quarterly earnings report is announced in their conference call and you find out that they beat their earnings, what do you think happens? Prices of the stock go up if they beat their earnings right? Not necessarily. You would THINK that, but if you’ve ever bought and hold stock hoping that the company crushes their earnings only to find out that shares tanked right after an announcement that they beat their earnings, it’s because they announced less than good GUIDANCE. Many times, guidance has arguably more impact than the earnings themselves.
Investors typically sell off shares if they find out that the forecast for the next earnings is much lower than expected, relative to the market across the board, because it’s a sign that the company is encountering some trouble in the months to come. This is especially true when the reasons for lower guidance can’t really be pinpointed. If I know a company is going through a little bit of a bind because of a pandemic or something, then I know that MOST companies might be affected for the same reasons. The likelihood of rebounding is much higher, and alternate stocks are NOT readily available. However if the markets are doing really well, the geopolitical climate encourages a bull market, and the company you invest in has low guidance? People suddenly have more investment options outside of the company than they do the one that’s struggling for next quarter.
One thing you can try doing is setting alerts for company earnings, so you can listen in on conference calls to find out what next quarter’s guidance looks like. You can find more info on earningswhispers.com/. Here, you can check earnings calendars and set email alerts or add earnings to your calendar for when earnings season is coming up for your top favorite companies.
2. News
The second tip is to look out for NEWS. This is basically what feeds anticipation for investors and causes them to buy in on stock. Think about anticipated vaccine development for major pharmaceutical companies or the next big video card being announced by a semiconductor company, or a big government contract to do cloud services like Microsoft. News about a company expanding their partnership or developing groundbreaking research or innovations will typically whet investors’ appetite but can also cut the other way. A more recent item is Tesla’s battery day; investors weren’t happy that news for new battery tech was disappointing. How this impacts the business is that it won’t turn up profits as quickly as one might anticipate if the technology were ready. Or it could spell doubt in investors that Tesla may not be able to deliver on ideas in the future.
This is the least fun item to track because you have to really keep your eyes on the news all the time to know what’ll happen. You’ll have an easier time if you focus on fundamentally strong stock and track news just around those. You can go to Google alerts to publish notifications to you when something surfaces on the web involving the company you want to keep an eye on. You can enter the company name, set the frequency of alerts, choose your sources, set the quality of results, and then your email address. Pretty nifty way to keep an eye on the news without doing much. What’s your favorite way to set alerts on current events of your interests? Let us know in the comments below!
3. Competition
Let’s talk about the third thing to watch out for, which is competition. One more thing to be aware of in how future value plays into share prices is competition. If a market sector loses one of its major competing players, what do you think is going to happen to the shares of its top competitor? If people bail from that company, all that money’s gotta go somewhere. Back in July, when Intel announced that it couldn’t deliver their new 7-nanometer chip technology on schedule, Intel shares dropped sharply, while AMD, one Intel’s major competitors rose 6% in a day. Keep in mind this impacts companies that specialize in a flagship product or service rather than a slew of products.
We’re all aware that current events and news affects the stock market but we seldom make the connection that the reason why prices move is not because of the current state of things, but rather, the future state of things. Tesla not keeping on battery innovations isn’t going to shut the company down right then and there. Intel not being able to deliver the 7nm chip doesn’t mean they’re going to close their business; that’s not why investors sell off, causing the price to drop. They sell off because of the IMPLICATIONS of the health of the business in the future. If we know exactly how a company, or the stock market, or any investment you can put your money into behaves in the future, there wouldn’t be any value to that. Or the value now would reflect the value in the future, really quickly. Keep this in mind when you invest. And hopefully this clears up the question as to why the stock market doesn’t always reflect the economy in the here and now.
And there you have it folks. These are the 3 things many smart investors look for in the future, which includes looking at guidance, news, and competition.
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-Call to Leap Team