Watch for These "Gotchas" When Reviewing Quarterly Reports
Changing consumer and business behavior as the Covid-19 pandemic took hold are now causing atypical comparisons to past periods.
As we expected, results for many companies reporting their second quarters of 2021 cannot be taken at face value. Changing consumer and business behavior as the Covid-19 pandemic really took hold in the second quarter of 2020 are now causing atypical comparisons to past periods when times were more “normal” than the present.
For some companies, the pandemic brought opportunities for increased sales and profits, while others faced closures, employee layoffs, and hits to their income statements. Though the U.S. fell into a recession in mid-2020, not all companies in industries traditionally considered economically sensitive were adversely affected. 2020 marked the start of unusual times (and we are nowhere near their conclusion).
In analyzing company results for the second quarter, we have seen many companies offering comparisons not only to the same quarter last year, but to the same quarter two years ago, often accompanied by an annualized rate of change. This is a terrific way to add context to the numbers, and we applaud those companies that have offered this information.
Wall Street being Wall Street, though, often rewards companies for posting big gains over the last year, even if those gains come from a period of depressed results and the current year might best be categorized as a return to normalcy and not especially remarkable. Press releases that proclaim record results and impressive growth rates.
In other cases, companies are penalized for showing lower growth compared to the same quarter 2020, even though the 2020 quarter saw the company reaching a high point primarily due to the unique times. When considering the gains made since 2019 for many of these companies, the slower growth shown for the most recent quarter is understandable and not problematic, despite what the rest of the market might think.
From our perspective, it’s imperative to dive deeper into a company’s results to understand the longer-term trends, and focus on those factors that determine the likely path that the company might follow in the future. In each issue of the SmallCap Informer, we update subscribers on companies that have reported results since the prior issue, and you can count on our analysts to give you the proper perspective so you can make the best decisions for your stock portfolio.
- DOUG GERLACH
Reprinted from the October 2021 issue of the SmallCap Informer.