What parts of earnings reports should we key on? I see reports that look great but then there are follow-up stories about sales outlook, etc. that make the market perceive reports as negative. (November 14, 2000)

  Today every part of the report is scrutinized: top line earnings, bottom line earnings, revenue growth, gross margins and very important of late, future guidance. For example, when Cisco announced earnings, it was hit hard after hours because they were not blowout. Never mind they were exactly what Cisco always reports, i.e., a penny above expectations on earnings and impressive revenue growth. They were not blowout at a time the market was in need of blowout earnings. About an hour after the release, however, after the stock was down almost $3, the company pounded the table on future guidance, raising its own outlook for margin growth and other areas. The stock shot back up on the news; it did not overcome all of the selling, but it set out a rosy forecast. The market wanted to know about the future, not the past, and it waited until it received that solid guidance. Indeed, Cisco reiterated that guidance today.

Look at Dell as another example. When it met earnings right after the close, the stock enjoyed a nice gain in after hours trading. That went on for an hour or so until the conference call indicated that future revenues would be just 15% and not the 30% previously stated. The stock was pounded immediately after the release of that information.

Thus, it depends upon the market environment. When investors are worried about the future, they want soothing words about how orders are great and demand is strong and they are going to make even more money next quarter. When things are rocking along comfortably, beating actual earnings per share estimates and growing margins is good. We like to see revenue growth year over year to be 50% or more for the stocks we are putting most of our money into. That indicator has historically shown that a company with that type of revenue growth is a leader or ready to become one.

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