We're now in the last throes of July, which means the next earnings season for ASX shares is just around the corner.
Here on the ASX, most stocks report their latest earnings, covering the most recent half-year or year, every six months. The first earnings season normally takes place over February and March. The second, over August and September.
It's obviously the second season that is fast approaching.
As we discussed yesterday, earnings season is usually a momentous time for investors, as we normally see some of the largest share price moves of the year for many shares. That's because when a company reports its latest numbers, it tells investors how it is doing, and whether its growth is measuing up to expectations.
If a company fares better than what the market anticipates, it can lead to a rush to buy more shares. Conversely, though, any misses can be punished with share price falls, sometimes savagely.
It's the latter scenario that we'll be discussing today.
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Read before you sell your ASX shares this earnings season
When a company unveils a disappointing earnings report, it can be very distressing for existing shareholders. After all, no one likes to lose money, even if it's on paper.
However, it's important to be aware of the psychological consequences of watching how the market reacts to an earnings report. A big sell-off can immediately trigger investors to follow suit. There's an assumption that the market always knows best, and if others are selling, there's a good reason why.
That can sometimes be the case, but not always. As we discussed yesterday, the markets are populated with institutional and professional investors who have very short time horizons. They often aim to make money over quarters, not years. If they think a stock will prove to be a bad investment in the coming months, they will usually not hesitate to sell, even if the longer-term outlook for a business remains rosy.
This can lead other, smaller investors to believe that there is something fundamentally wrong with a company after a poorly-received earnings report, when in fact, there is only a minor speedbump ahead on an otherwise clear runway.
That's why I believe it is important to keep some perspective when reading an earnings report. It's probably a good idea to go back and refamiliarise yourself with the reasons you bought an ASX share in the first place when it has an upcoming earnings report. Then, read the earnings report without looking at the subsequent share price reaction.
When should you sell an ASX share?
If there is anything in that report that makes you question your original thesis, then you might have cause to consider selling. If you suspect your thesis is broken and the business is in terminal stagnation or decline, it can also be just cause for joining the crowd in selling. But if there's a temporary issue that won't affect that company's long-term profitability or growth runway, you can understand why the market is reacting the way it is. It might even be a good opportunity to pick up more shares at a cheaper price if the market is indeed overreacting.
But make sure you get a look at the numbers before you see the emotional reaction of the market. You don't want to let the latter influence how you view the former.
