This SINGLE Sentence Will Determine Your Nest Egg’s Fate
“This is the most important lesson of the entire semester.”
That’s what my finance professor said in front of a 300 seat auditorium.
Then she said it again.
“Everyone, wake up! This is the most important lesson of the entire semester!”
I remember this like it was yesterday. She kept repeating the same phrase over and over. And frankly, it’s one of the most important pieces of financial advice you’ll ever hear.
Whether you’re an investment banker or a Main Street investor trying to build a nest egg, your portfolio will rely on this SINGLE sentence. And today, this sentence is especially relevant…
Here’s what she was repeating:
“The value of a company is the present value of future cash flows.”
Broken down, she’s saying that the value of a company today is worth the sum of future profits. Which for us is why it’s important to look forward when making investment decisions.
This is especially true in today’s innovation driven economy, where companies are now forced to reinvent themselves at a much faster rate. Because they know if they don’t evolve, their competition will, which could soon put them out of business.
This brings me to the short-sighted phenomenon known as earnings season…
Today, we are smack-dab in the middle of earnings season — arguably one of the most exciting times of the year for investors.
Four times a year, publicly traded companies release their quarterly earnings report to inform investors about their recent performance. Going back to my hedge fund days, I remember seeing traders propped up on the edge of their seats, ready to buy or sell solely based on a company’s quarterly result.
In these reports, companies announce whether or not their performance met Wall Street expectations, and give guidance on the company’s future. The sudden bits of information can cause stock prices to quickly jump higher or lower — which adds to the intrigue of earnings season.
Just take a look at these price jumps from last week’s earnings action:
- Tesla Inc. (TSLA) — immediately jumped 16% after reporting earnings.
- Intel Corp. (INTC) — jumped 8% after reporting earnings.
- Anika Therapeutics Inc. (ANIK) — jumped 35% after reporting last week.
But remember what my professor kept repeating in that 300 seat auditorium… “The value of a company is the present value of future cash flows.”
Notice how this statement has nothing to do with the past. The statement isn’t “the value of a company is the present value of yesterday’s cash flows,” or “the value of a company is the present value of last quarter’s earnings.”
Meaning it’s not the revenue and earnings from the previous quarter that matters most — don’t get me wrong, these metrics do matter. But what long-term investors should care most about is the future outlook of the company that comes with these earnings reports.
Here’s an example from Intel: Last week, Intel reported that the company earned $1.42 per share vs. $1.24 expected by Wall Street, which was a massive beat for the chipmaker.
This demonstrated that an upward trend is already underway, which is good news for investors.
But what really pleased investors — and what actually sent the stock up 8% after reporting — was Intel raising its guidance for full-year earnings to $4.60 per share when Wall Street analysts expected only $4.39 per share.
This tells investors that the upward trend from last quarter is here to stay.
So as we continue moving through this earnings season, I recommend paying attention to not only the earnings and revenue results from the previous quarter, but more importantly the guidance figures going forward.
This will help you spot the market’s strongest stocks, while giving you a chance to ride their momentum higher.
Now let’s get to the other most important stories of the week…
Must Knows for Monday, October 28th
Earnings on Deck — On Monday, look for earnings reports from AT&T, Spotify, Walgreens Boots Alliance, Beyond Meat, Alphabet, T-Mobile and NXP Semiconductor.
On Tuesday, looks for earnings reports from MasterCard, Merck, Shopify, Pfizer, General Motors, Amgen, AMD and Grubhub.
On Wednesday, look for earnings reports from General Electric, Apple, Facebook, Yum Brands, Starbucks, Sony, Twilio, Crocs, Royal Caribbean, ADP, Callaway Golf, Lyft, Etsy, McKesson and Western Digital.
On Thursday, look for earnings reports from Altria, Pinterest, U.S. Steel, Bristol-Myers Squibb, Kraft Heinz, Cigna, Estee Lauder, Marathon Petroleum, Wayfair and American Tower.
And wrapping up the week on Friday, look for earnings reports from Alibaba, AbbVie, ExxonMobil, Chevron, AIG and Newell Brands.
Here’s What I’ll Be Watching — With so many earnings reports on deck this week, there are bound to be countless insights into not only these individual companies, but their industries and the economy as a whole. Here’s what I’ll be watching:
There’s plenty of uncertainty surrounding many of the companies that report earnings this week. For example, data privacy factors surrounding Facebook, the vaping epidemic threatening Altria, and the activist deal that AT&T inked earlier this morning. Therefore, I’ll be watching for commentary that clears up these situations for investors.
In addition, a few “bubble” stocks — like Beyond Meat and Lyft — report earnings this week. I’ll be paying attention to the growth rates and earnings forecasts for these companies to determine if eventually they’ll deserve some of your hard-earned investment dollars.
Rate Cut Ahead — On Tuesday, the Federal Reserve will begin its two-day meeting to decide future interest rate policy. Currently, investors are pricing in a 94% chance of a quarter-point rate cut. One thing to watch, however, is how unified this month’s decision is. That’s because last month’s meeting saw 5 members vote against a cut, while just 7 voted in favor. Tune in Wednesday at 2pm for the decision.
Jobs, Jobs, Jobs — Remember, the consumer makes up for nearly 70% of economic activity in the United States. So it’s important to keep an eye on the current state of the consumer while making investment decisions. On Friday, we’ll get one of the most accurate updates as the employment figures for October get announced.
That’s all from me today. Have a great week and I’ll talk to you tomorrow!
Here’s to growing and protecting your wealth!