Ignore Earnings Guidance. Here's a Better Indicator of Business Potential

An interesting event has been unfolding recently in the stock markets.

You see, the companies are announcing not just quarterly and annual performance, but through earnings calls, also sharing what they expect in FY24.

The 'guidance' is as usual upbeat and optimistic, as no one likes to hear the bad news.

If you're on social media or any finance channel, you would have come across commentators and influencers quoting one thing or another.

And the markets are eating the news up, as is evident in the wild swings in the stock prices.

An earning disappointment is leading to sharp correction. Lesser tracked stocks are in the limelight due to positive guidance. Finfluencers are cashing on this opportunity to peddle the next potential winner or downgrade another on the basis of such news.

When too many stock participants operate this way, it often ends up becoming self-fulfilling prophecy, but again only for the short term.

As Benjamin Graham says....

• 'In the short run, the market is a voting machine, but in the long run, it is a weighing machine.'

In the long term, what wins is the management quality and the fundamentals of business. And even then, investors make money only when they have a margin of safety in their buy price.

I don't intend to undermine earnings season and ensuing calls. It's a rare opportunity for retail investors and analysts to interact with the management in public.

But then there is a concept of marginal utility of information and its dissemination. Beyond a point, it diminishes. I have a problem with how the earnings reports are read and interpreted.

On a CNBC interview, here's what Warren Buffett said about this quarterly charade...

• I like to read quarterly reports as an investor. I like to get those quarterly reports. I do not like guidance. I think the guidance leads to a lot of bad things, and I've seen it leading to a lot of bad things. I think it's a very bad practice to be in the game of earnings guidance, and it is a game.

As I have shared before, businesses don't get defined by a quarter. And it takes years to reflect the results of all the strategies and vision to play out. Disciplined and seasoned long-term investors understand this and play the game to their edge.

That said, if you are looking for quick cues to the future of the business, I can share a better, if not fool proof hack. You will still have to do your due diligence.

With this, you don't just get a watchlist of stocks, but also a sense of the price at which owners are willing to buy more of the shares from the open market.

I have used this often as a starting step to run screeners and have come across some gems that have finally made it to the recommendations.

This is the filtered list of stocks that witnessed insider buying (promoter group/directors) at a price higher than the current stock price (as on May 11, 2023).

The list has been filtered to avoid stocks with high promoter pledging over 5%, debt to equity ratio higher than one, marketcap less than Rs 5 bn, return ratios (return on capital employed) less than 15%, and promoter stake less than 50%.

Promoter Group/Director Buying in Last Three Months

Balaji Amines

G N A Axles Ltd

HCL Technologies Ltd

Meghmani Finechem Ltd

RPG Life Sciences

Source: BSE

You could further use Equitymaster screener for stocks where promoters have increased stake.

And by the way, this tool is available to every retail investor. To understand how to use it to your advantage, here is a short video:

With further work on parameters such as return on equity, debt to equity, consistency in the profit margins, cash conversion cycle, pledging, growth in the business, management quality, cash flows comparison with earnings, and historical and current valuations, you could further refine the list.

Now as I mentioned before, this is not to suggest or hint at any view on the stocks. But what you have is watchlist that is worth taking note of.

As the legendary investor Peter Lynch has said:

• 'Insiders might sell their shares for any number of reasons, but they buy them for only one: they think the price will rise.'

Of all the stakeholders, it's the promoters who know the most about their businesses, and future potential.

If they are willing to part with their personal money to buy stocks from open market, there is good possibility that they believe the stock is undervalued and will potentially rise in the future.

Unlike tips that you come across on the social media (especially amid earnings season) that could be just a front running exercise, promoters are invested in the business for the long haul.

Hence, keeping a track of what they do with the stocks of the companies they own could give you interesting insights about the businesses' prospects.

If you think about it, promoters increasing their skin in the game is one of the most comforting and credible indicators. And a better one than the over ambitious guidance they offer during the earnings season.

It's like basing your decisions on someone's actions rather than words.

What do you think, dear reader? Write to me with your thoughts.

Warm regards,


Richa Agarwal
Editor and Research Analyst, Hidden Treasure