Last Friday, President Trump took to Twitter to make public his opinion that public companies should report result only twice a year instead of quarterly. He called on the SEC to investigate changing the reporting requirement.
Quarterly reporting has been the norm since the Securities Exchange Act of 1934, which mandated quarterly 10-Q reports in each of a company’s first three fiscal quarters and a more intensive 10-K report at the end of the fiscal year. Very small public companies can file an accelerated form, but the limit is so low - $700M in public float – that essentially every U.S. public company files the same way.
A separate filing on form 8-K is required whenever there is a material change in a company’s business in between quarterly filings.
The intention was to ensure that companies release accurate and uniform information about their performance and financial condition and to do so to all investors at the same time. That goal makes just as much sense today as it did in the shadow of the 1928 crash and in the midst of the great depression. The fundamental logic is unassailable – If you’re going to take money from the public in securitized equity (or debt) investments, you have to accurately inform those investors what you’re doing with it.
Many corporate executives applauded the proposed move to bi-annual filing for two distinct reasons. The first is simply that the filings impose an administrative burden and reducing the frequency would result in cost savings. The more fundamental reason is that management at many firms feels that the market impact of quarterly reports on share prices causes them to make decisions that may be good for short term share prices, but which harm the company’s long term earnings prospects.
After all, a decision to invest in capital expenditures, leases on property or equipment and the hiring and training of new employees might take months or even years to reach the bottom line but, depending on accounting treatment – might reduce net earnings in the short-term.
Tesla (TSLA - Free Report) CEO Elon Musk cited this exact logic as part of his consideration of the possibility of taking the company private. He seeks to avoid the public glare around financial performance and the resulting swings in share price, which admittedly can have a significant impact on a company’s ability to raise needed cash and compensate employees.
Although administrative simplicity and encouraging corporate management (and investors) to focus longer term are laudable goals, it’s hard to imagine how less information will benefit the investment community as a whole. Trends in earnings and earnings revisions are fundamental to the Zacks Rank, which has been an extremely effective strategy over the past several decades, more than doubling the return of the S&P 500 since 1988.
For long-term investors, having the most complete set of information possible at all times is crucial to making wise decisions. Less frequent reporting would likely benefit those with better connections to the detriment of the investing public.
What About Short-Term Thinking?
It’s undeniable that short-term day traders are constantly seeking ephemeral profits in the rapid buying and selling of shares, especially around earnings announcements. This activity exaggerates price swings – which us undoubtedly frustrating for company management – but in the end, it’s just “noise.”
Smart long-term investors should avoid hitting the “buy” and “sell” button at the exact moment a company reports results that are a few cents above or below expectations and concentrate instead on what the entire presentation says about the company’s prospects for delivering earnings growth over the coming months and years. Television news tends to focus immediately on the revenue and net earnings numbers as soon as they are released, but there’s generally a lot more information to be gained in the investor presentation and conference calls that come later.
Use Zacks.com and the Zacks Rank as tools to understand the likely trajectory of earnings in the future.
It can be exciting to chase quick trading profits around earnings, but history shows us that it’s a losing game. Choosing companies with positive earnings estimate revisions works in the long term. Use all the information available, build your diversified portfolio carefully and do your best to ignore the noise.
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