Two-Step Earnings

Two-step earnings is a slang reference to two companies whose earnings tend to move in tandem. The earnings for the companies tend to increase in a slow-slow or quick-quick fashion.

The term "two-step earnings" comes from a dance step most often danced to country music. The words "two-step" do not refer to the number of people doing the step, in fact, the dance can be done by one person, a couple or even a line of dancers. Instead, two-step refers to each of the dancer's feet taking a similar step. For example, a common two-step version has the right foot taking a quick step followed by the left also taking a quick step, then the right foot taking a slow step with the left foot following suit. This pattern of quick-quick, slow-slow continues throughout the dance, although the direction of the steps may vary.

In the business world, the right and left foot are replaced by two businesses. These businesses move in tandem or near tandem — when one company's earnings increase quickly, the other company's earnings do the same or follow shortly thereafter, and when one moves slowly or declines, so does the other one.

Two-step earnings can occur for a variety of reasons. Businesses selling the same products may have earnings that move in a similar fashion. For example, two companies that make snowmobiles would most likely both see their earnings increase quickly in the winter, then slowly decrease as spring approaches. Another reason could be one business is the sole supplier of raw materials for another business. When the business selling the finished product see a fast increase in earnings, their supplier will probably experience the same growth because the business they supply for will require more raw materials to keep up with demand.

Investors can use the two-step earnings approach to decide when to buy, sell or hold an investment. If an investor is considering purchasing stock in Company A, which is part of a two-step earnings relationship with Company B, and Company B's earnings start to drop, the investor who is aware of the parallel between the companies can wait until Company A's earnings, and presumably its stock price, drops before purchasing it. Or, if Company A's earnings are increasing, an investor with stock in Company B may choose to hold on to it instead of selling it.