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The 4 Rules of Earnings Season, Plus Tips: Buy Under Armour Next Week, Dump Amazon A.S.A.P.

Stocks in this article: TWTR UA AMZN MSFT

"Every battle is won before it's ever fought." -- Sun Tzu

NEW YORK (TheStreet) -- The hyper-active and borderline desperate Twitter (TWTR) feeds for Under Armour (UA) and Amazon (AMZN) illustrate the gap between what many shareholders think is a positive earnings report and what actually is.

Immediately after reporting earnings on Thursday, shares in Under Armour, Amazon and Microsoft (MSFT) popped higher, but only Microsoft continued higher. All three increased revenue. From an operational point of view, they all executed extremely well. But their performance diverged.

Let's examine the differences and how investors can empower their portfolios with other holdings and profit from future earnings releases.

The first rule of earnings season is to never chase a stock unless you're taking a stop loss. If your trading desk doesn't include a Bloomberg terminal or another equally fast wire subscription in unison with computer-directed trading, you're fighting a losing battle.

MSFT Revenue (Quarterly) Chart

The second rule is that only the uninformed focus exclusively on if the company beat or missed earnings expectations. Earnings results are just that, results that report what happened BEFORE. But the market focuses on what WILL happen. Big-money Wall Street fund managers -- the whales that move a stock price -- review last quarter's results only up to the point the data aids in predicting future expectations.

While many are satisfied if Under Armour, Amazon and Microsoft outperform their previous quarter, fund managers closely scrutinize margin trends, forward guidance, growth rates (or lack thereof), competitive influences, management changes, cash flow, dilution and other factors. They are painting a picture of the next quarter, the next year and beyond.

The third rule is that one quarter doesn't matter. That's a hard one for many to understand in the heat of battle. Patterns can't be found in sample sizes of one. Fund managers plug a given company's results into spreadsheets and compare the results with previous quarters to find hidden patterns and trends.

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