Not All Earnings Quarters are Created Equal

Dave Hannibal, ‎Global Manager, Channel Partners at FactSet contributed to this article.

An insight that we have discovered at Alpha Hat is that certain quarterly earnings announcements are more important for companies than others. We measure the importance of a quarter by analyzing absolute stock price movement (volatility) the day after an earnings event. A quarter that repeatedly experiences greater volatility than others implies that there is something systemically important occurring. For instance, critical annual product launches (e.g. Apple iPhone), sales seasons for retail companies, or the release of annual guidance can all lead to a company exhibiting more volatility when announcing results for certain quarters. While this makes intuitive sense, we have found that the market typically does a poor job in predicting earnings seasonality, thereby creating an opportunity for investors. 

An Example of Earnings Seasonality at Best Buy

An example of seasonal earnings volatility can be observed at Best Buy. Since 2006, CQ3 events (announced in CQ4) are the most volatile. The median absolute price movement for the day following CQ3 earnings announcements is 11.95%. In comparison, the least volatile quarter is CQ4 which has a median move of just 4.35%. CQ3 earnings announcements are volatile for Best Buy because holiday quarter (CQ4) guidance is typically announced for the company during this release. The holiday quarter is critical for Best Buy and accounted for 35% of annual revenues and 50% of earnings last year.

The Market Does a Poor Job in Predicting Earnings Seasonality

We can determine if and how the market typically recognizes earnings seasonality by using historical implied volatilities to show expectations for earnings moves prior to the event (here, implied volatilities from the day prior to an earnings event were used to predict the one-day move following the event). In general, we have found that market expectations for earnings volatility show much less dispersion between quarters than what occurs in actuality—this means that the market poorly accounts for the fact that certain quarters are more volatile and important than others.

For instance, Apple is most volatile when announcing CQ4 results in CQ1. Typically, this has been the first full quarter of results for new iPhone models and also accounts for the holiday quarter. While the market does appear to predict some level of seasonality, the dispersion between the most and least volatile quarters is only predicted to be approximately 1%, whereas in reality the number has been closer to 3%, with CQ4 being much more volatile than the other quarters.
 

Electronic Arts is most volatile when reporting CQ1 results. This is the end of its fiscal year and it usually provides full year guidance for the following year. We see a significant differentiation between CQ1 volatility and other quarters; the spread between the most and least volatile quarters is 7% for actual results but less than 2% for predicted results.

Deckers is a retail brand that makes the majority of its revenue in CQ4. In addition, revisions to full year guidance have often been announced during this quarter’s earnings call. Again, the spread between most and least volatile calls is much greater for the actual results (~7%) than predicted (~3%).

Opportunities for Investors

This type of analysis is important for investors for two main reasons:

1. Investors should know which quarters are most important for their stocks in order to manage risk appropriately. Knowing when a company has typically announced revisions to earnings guidance or when the results of important product launches will be evaluated by the market is invaluable information. 

2. Where mispricings exist in the market, investors can find opportunities to go long or short. 

Alpha Hat builds next-generation analytics tools which enable investors to discover richer insights from data. FactSet has partnered with Alpha Hat through Fintech Sandbox, a program that provides innovative financial technology startups with data from the world's leading data providers.