It’s earnings season.

If you’ve tuned in to the financial press, you’ve surely heard the term.

Around our place that means a couple of things… a couple of very different things.

When we have our investing hat on, of course, the flurries of profit reports from Wall Street keep us busy. They tell us whether our forecasts were right.

Lots of money is made as forecasts become reality.

But there’s another type of earnings season around here…

This one you may not know all that much about (we’re odd that way), but it’s just as important. And, once again, big money is on the line.

You see, we bought a new ram the other day.

He has just one role on the farm. We drop him in with our ewes, he goes wild-eyed for a few minutes and then he goes to work.

The lambs that result are how the flock earns its keep.

Measuring Up

Like most things, what we see on the surface paints no clear picture of just how complex things really are.

To some, a ram is just a ram.

As long as he didn’t go through the “great cut” when his brothers did… he’s a fine candidate.

But things are never that simple.

When we dive in, we learn all the variables. And we see that the more homework we do leading up to “earnings season,” the more success we’ll have.

Like cattle, sheep are measured by a variety of useful traits.

We score how many lambs each ewe has in a season.

We measure their birth weight. We weigh them again at weaning.

The more they gain, the higher the score.

We compare them based on disease resistance… the thickness of their coat… the number of worms in their poop… and even the thickness of those two moneymakers between their legs.

But here’s what’s most interesting.

It’s where the sheep world and Wall Street collide in an oh-so-interesting way.
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What Matters Most

Genetics makes up only a small part of an animal’s performance – just 25% or so. The rest depends on how they were raised.

The pasture they graze, the supplements they’re fed and even the weather play a vital role.

Even the best progeny will have a tough time putting on weight if he was born in a raging blizzard or forced to graze a patch of thistles.

In the animal world, ranchers score based on the average. If a ram has a bigger pair than the average fella, he gets points for every percent he’s above average.

If the poor guy lets a bit more light through his legs… he gets a negative score.

Run the numbers and we get a strong sense of the animal’s overall genetic makeup.

When we cull the lower performers and add the high scorers to the flock or the herd… everybody down the line is better off.

Sure, we can build a nice group of critters with some luck and some healthy pasture, but good genes make things a whole lot better.

Stocks are no different.

Luck vs. Genetics

It’s an important lesson for investors… especially investors who may not have the balls genetics it takes to rely on luck.

That’s why earnings season is such a pivotal time on the Street.

Yes, we can use things like alpha and beta to compare one stock with the herd. But right now we can dig into the books to see just how much weight the company has gained, how bad the worms are… and whether there’s any disease we need to know about.

This is when we can get a true measure of a company’s genetics.

Yes, stocks move together much of the time. Just like in nature, we’d argue 75% of a stock’s movement is based on the economy and the market around it.

But it’s that other 25% that makes a winner.

Watch it unfold over the next two weeks.

In fact, we’re already seeing it…

Bank of America (BAC) struck out. Goldman Sachs (GS) hit a home run.

Both are bank stocks. Both do the same things in the same economy. But one clearly has better genetics.

Earnings season is the prime time to do your homework and set yourself up for strong, market-crushing returns.