Deciphering companies’  earnings calls

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Analysts and investors eagerly anticipate earnings calls—quarterly conference calls in which a public company’s executives discuss its latest financial performance. However, a September 2013 study found that understanding how companies conduct these calls can boost your portfolio returns.

The key is the question-and-answer session at the end of the call, when analysts ask the executives questions. Often, companies decide ahead of time which analysts may ask questions. (The study calls this “casting the call.”) A company might cast a call even if the news is positive, but the study says the pattern of choreographing question-and-answer sessions when the news is negative is “systematic” across all companies. The study, which was published by researchers from Harvard University, London School of Economics and National Bureau of Economic Research, found that companies that don’t cast their calls perform about 12 percent better per year than do companies that cast calls even occasionally.

You should listen to earnings calls of the companies in which you invest (they typically are available on companies’ websites) and note which analysts ask questions. The study found that companies that barely meet or exceed earnings expectations are more likely to cast their calls, because they don’t want to be pressed by skeptical analysts. If the only analysts who ask questions are those who gave a stock a high recommendation, then you should consider selling.