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TheStreet Open House

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

Stocks in this article: TWTRUAAMZNMSFT

"Every battle is won before it's ever fought," said Sun Tzu, and we all know it. But do we live it?

Are you reading the SEC filings and taking the time to understand what's happening below the surface level? Keep in mind that a company and its stock are two decidedly different things. For example, Under Armour and Amazon increased revenue, demonstrating strong demand for their offerings, and yet the stock fell.

For investors, it's more pertinent to understand the stock than the company. It may appear counter-intuitive at first, but investment decisions should focus on the stock first and company second. Understanding the stock requires a full comprehension of the company filings.

Reading Qs and Ks (quarterly and annual reports) may be an insomnia cure for people who don't respond to strong medication -- a hat tip to Robin Williams -- but they're gold mines of information. Anyone can read the reports. But understanding what to look for, and how to read past a presentation that is sometimes more useful to management goals than investors, separates those in the know and others playing a guessing game.

If you want to know what to look for, I suggest picking up Wiley's Financial Statement Analysis: A Practitioner's Guide, by Martin Fridson and Fernando Alvarez. It's a great read for non-finance majors. Plus it will be worth its weight in gold the first time and every time it helps you find information buried within an earnings report.

The fourth rule, and this one is broken on a daily basis for reasons I don't understand, is that if it's common knowledge, it's priced in and doesn't matter. Using Amazon for even one moment, everyone knows that the company has an advantage over small bookstores. Amazon has invested heavily into its logistics system and is able to move books and other products from supplier to your home at a lower cost than most others can.

Every bit of public information is already priced into the stock. Unless you know something almost everyone else doesn't, the information isn't valuable. In fact, relying on common information is often detrimental. Under Armour's earnings release demonstrated enormous growth, but everyone and their brother already expected it.

As a result, when the company didn't crush the already mile-high expectations, the stock quickly sold off, causing an avalanche of sellers rushing for the exits. As an independent investor, your greatest advantage is focusing on industries you already know about. If you're in the sportswear industry and can see trends before they show up on analysts' spreadsheets, you have an edge over money managers.

I don't mean inside information that regulations prohibit insiders from trading on. If you work in a medical office and notice a new product or an improvement to an old product that you like and others like, it's probably worth your time to investigate the company that produces it.

Now let's go full circle and examine the chart patterns for our three earnings-related stocks.

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