How to Make Money by Listening Closely to Quarterly Earnings Calls

Let's take a moment from stressing about something we have no control over -- this week's Federal Reserve meeting -- and focus on something we can make money on: quarterly conference calls. This coming week is, by most accounts, the busiest of earnings season. That means a lot of conference calls. How can we benefit?

There is some debate in the financial community on how beneficial conference calls can be to the average investor. Some think they are worthless, others find them critical to long-term success. There's no right answer. To each his own, but I personally find them useful. Here's how.

Management Credibility

All good longer-term investments need good management. There's no two ways around this. For the large majority of investors the only real exposure to a company's management team is on the quarterly conference as well as media interviews management takes part in throughout the year. Listening to or parsing the text of a conference call can offer some very good insight to whether management has a clue.

Here's an example. Let's say during the first-quarter conference call that management says that a strong dollar will impact margins by 4 basis points. That would be called resetting expectations. Now let's say the company reports in the second quarter and margins were affected by 10 basis points. That's a problem.

Barring a huge move in currency, which can occur, how could management have been so far off? Either managers lied or they can't forecast accurately. To be honest, I'm not sure one is better then the other. You can also keep an ear out for catalysts the company says that are coming. If they don't develop, that's a red flag.

Tone

This is something that can be difficult to pick up from the text of a conference call vs. the actual audio. It's not too difficult to hear if management is merely going through the motions or is genuinely pleased about the results it is reporting and the coming prospects.

Some CEOs are routinely optimistic and craft well-orchestrated conference calls as a matter of habit. Think Howard Schultz at Starbucks or Kevin Plank at Under Armour. Other management teams are notorious for throwing cold water on the quarter, no matter what the results are. The Deere management team comes to mind.

Starbucks is a holding in Jim Cramer's Action Alerts PLUS Charitable Trust Portfolio. See how Cramer rates the stock here. Want to be alerted before Cramer buys or sells SBUX? Learn more now.

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