Does Management Deliver What It Promises?

When you are researching companies, you need to find out if management has delivered what they have promised in previous years. Promises can come in different forms, most notably:

• Future earnings outlook
• Company profitability plan
• Setting target growth rate of the companies
• What they want to achieve in five years.

Future Earnings Outlook

Warren Buffett’s Berkshire Hathaway never does earnings outlooks, which is okay. When the company is investing, it wants to increase the long-term benefit to the company, which means it does not need to worry about the short-term earnings.

Most companies do provide earnings outlooks. If you are researching companies that provide earnings outlooks, you need to search for those that under-promise and over-deliver results. That is good for the investors. When the company promises less, the investors’ expectations are also less. When they deliver results above what they promised, investors think that the company beat the expectations. Headlines are written as “earnings beat” or “earnings surprise” and the media’s positive coverage can fuel the stock price to jump 10 to 20 percent immediately.