I have stressed time and time again the importance of earnings reports and conference calls. I've created a beginner's guide to earnings calls and discussed some common mistakes that investors make when processing them. I've also examined some good, bad and misunderstood earnings calls, and I've provided tips for identifying their deceptive and confusing aspects .
Now I want to point out another aspect of earnings calls, which I call "earnings Easter eggs." Earnings Easter eggs are the comments or throwaway lines during the middle of an earnings call that often go unnoticed. They might not be directly relevant to the company's operations or quarterly results, but they can provide insight into broader issues that impact a specific sector or perhaps the entire economy. You can use these Easter eggs to help craft a trade or investment.
Here are some examples of the types of information you should look for:
Commodity or other input costs changes
Tax laws changes
Weather or environmental factors
Here are some earnings Easter eggs that I've come across during this earnings season.
. The purveyor of the Big Mac mentioned that the company expects to increase sales in France after the French government
lowered the value added tax for restaurant diners
Certainly, McDonald's stands to benefit from this news, but we need to take this information one step further. This reduction in taxes will have a significant impact on the French consumer and I believe in the broader sense the French market. As you cannot directly buy the French Stock Index, the CAC 40, then I would suggest buying the
iShares MSCI France
. I think our own government could take a page from the French in terms of consumer taxation and nuclear energy, but let's leave that discussion for another time and place.
, which said on its earnings call that there are signs that the destocking cycle has ended in North America and Central Europe as customer orders have increased. The company added that it was going to bring some capacity back on line.
This is a good sign for the troubled steel industry. While everyone knows that the Chinese infrastructure stimulus machine is picking up steam, indications of pickups in North America and Central Europe were a pleasant surprise. If other industrial companies experience similar demand pickup, then a bottom in the economy could be confirmed.
Bank of America
mentioned that its Countrywide mortgage unit was profitable and is or will be accretive to earnings.
This is a positive for BofA shareholders, but the real message is that if a profitable mortgage lending unit would imply one or more of the following:
The mortgage business is picking up either through refinancing or new home purchases.
The U.S. Treasury and FOMC monetary policy is working.
Mortgages that were previously thought to be impaired or worthless may indeed have more value than currently stated.
These conditions could also extend beyond BofA to other troubled mortgage units at companies such as
. Furthermore, this might be an indication that homebuilders such as
are finally seeing an improvement in business.
Be on the lookout for these little earnings-call Easter eggs. Though they might seem irrelevant to an individual company, they could have broader economic and investing implications.
At the time of publication, Rothbort was long McDonald's and Bank of America, although positions can change at any time.
Scott Rothbort has over 20 years of experience in the financial services industry. In 2002, Rothbort founded LakeView Asset Management, LLC, a registered investment advisor based in Millburn, N.J., which offers customized individually managed separate accounts, including proprietary long/short strategies to its high net worth clientele. He also is the founder and manager of the social networking educational Web site
Immediately prior to that, Rothbort worked at Merrill Lynch for 10 years, where he was instrumental in building the global equity derivative business and managed the global equity swap business from its inception. Rothbort previously held international assignments in Tokyo, Hong Kong and London while working for Morgan Stanley and County NatWest Securities.
Rothbort holds an MBA in finance and international business from the Stern School of Business of New York University and a BS in economics and accounting from the Wharton School of Business of the University of Pennsylvania. He is a Term Professor of Finance and the Chief Market Strategist for the Stillman School of Business of Seton Hall University.
For more information about Scott Rothbort and LakeView Asset Management, LLC, visit the company's Web site at
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