It happens like clockwork. Every January, April, July, and October, publicly-traded companies issue quarterly financial reports. The numbers are dissected instantly, and can move stock prices way up … or way down.
Quarterly reports are chock-full of numbers, but the bottom line is earnings. Today I'll explain why earnings are important. Then I'll show you how ETFs can help grow your earnings, too.
What Are Earnings?
Let's start by defining our terms. For a corporation, "earnings" is what's left after all the adjustments, and it can be positive or negative. "Net Income" is a more precise term. Whatever it's called, profits are what you want to see. That means the company was able to cover all its expenses and make money for the shareholders.
Earnings are usually reported on a "per share" basis. When you hear analysts talk about "EPS," they're referring to "earnings per share."
Earnings matter because investors buy stocks in the hope of making a profit. Maybe they'll wait if the company has a good story, but they won't wait forever.
Just this week, for instance, toy-maker Mattel (MAT) reported first-quarter total net income of $7.8 million, or $0.02 per share.
Is two cents per share good or bad? That depends on the price. Before the announcement, Mattel shares were trading near $34.
Would you pay $34 to buy a share that earned you only two cents over the last three months? Probably not. Mattel shares fell 10 percent on the disappointing news.
So how does this relate to ETFs? I don't mean to sound flippant here, but stock ETFs are composed of stocks. All those companies either make money or lose money. Your earnings depend on their earnings.
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This being the case, you probably want to be in an ETF whose stocks are, on average, delivering decent earnings, relative to their share prices.
Remember our Mattel example above? That two-cent EPS number would have been much less startling if the shares were only, say, $10 instead of $34. Earnings and price are closely related.
A few years ago, a company called WisdomTree began offering ETFs with a unique fundamental-based strategy. Traditionally, stock portfolios had been weighted by a company's size, or capitalization.