Companies on the NYSE and NASDAQ report earnings quarterly so that means every three months, you have a time period where earnings are days or weeks away. A common question investors have is whether they should buy a stock before earnings come out or wait until after earnings have been released.
This is a question I have struggled with all my investing life and I’m pretty sure there isn’t any cut and dried answer.
Buy Before Or After Earnings?
The dilemma usually is: what if I buy the stock before earnings and then it goes down? Or what if I wait to buy a stock until after earnings and then it goes up and I have to pay a higher price? Indeed, it is a problem with no answer!
I assume you are an investor who has no insider information and without it you can’t truly know whether earnings are going to be good or bad. You may feel or read that they will be one way or another but you can’t really know for sure. If you like, you can base your decision on what you read or what is being talked about in the media. If the word on the street is that earnings will be good, you might decide to buy ahead of the announcement. If they are supposed to be average or bad, you might wait.
But sometimes stocks go down on good news or good earnings and they can go up when the numbers appear to be bad. So, there is no guarantee that even if earnings turn out to be what you suspect, investors will act in the way you think they will act. I can’t count the times when a stock of mine reported earnings and the stock price actually went the opposite way I thought it would!
This Is What I Usually Do
I am not a gambler – I am an investor. Therefore, I feel buying a stock right before earnings is kind of gambling on what those earnings will be. Since I don’t know what those earnings will be, I would rather wait and see what happens.
The closer a company is to an earnings date, the less likely I am to buy the stock before it reports. By waiting until after earnings are announced I then have more information and am better able to determine if I still want to own the stock. I’m willing to risk the stock going up to get that additional information. Please remember though, I am an investor who has a long term horizon and am not interested in making a quick profit and selling.
Should You Buy Stocks Before Earnings? Should You Wait Until After Earnings?
Your investing style and goals may allow you to take more risks than I like to take. You may not mind incurring the risk that a stock might go down right after you buy it in return for the chance that it goes up after earnings. You might feel totally comfortable buying before earnings and if so, that is okay. You should always do what you feel most comfortable doing as long as you understand the risk.
In today’s volatile stock market, big swings can happen both ways and it might confuse your decision if you wait. Here are two stocks that reported earnings today and you can see the huge moves in opposite directions each of them have made:
What if I were thinking about buying either of these two stocks before earnings and then decided to wait? What would I do today? These big moves could really make my decision much more difficult than it was before earnings!
In the end, I might decide to pass on both of these because 1) I’m scared NFLX will go down even more and 2) CMG is now too expensive.
I can only recommend that you take a look at each stock you are thinking of buying and do as much reading and research as you can. Think about why you think the stock will go up and what your tolerance is for loss if you are wrong. Then, if you are near an earnings date, decide whether you feel better about waiting for the earnings or are comfortable jumping in before they come out. The right time to buy a stock is the time you feel best about buying it.