The start of earnings season is still a couple of weeks away (October 13) but analysts are already working their numbers to factor in higher labor costs and potential supply-chain disruptions along with strong demand, an article in Barron’s reports. Those numbers, when released, will be thoroughly analyzed, prompting stocks to move based on whether those analyses shows a good surprise, or a letdown.
But investors should pay close attention to the language being used by management on earnings calls. A study from Nomura quantitative strategist Joseph Mezrich found that the simpler the language used in earnings calls, the better the return, with simpler language returning 19.2% annually compared to 13.4% for the most complex language. And the simple language portfolio was less volatile than the complex language portfolio, the article notes.
One explanation? Simple language might give more confidence among investors because it conveys management’s vision better, which would lead to subsequent stock outperformance. In short, keeping it simple could also mean keeping it profitable.