It’s that time of year again!
Definitely read my blog post on how I play earnings stocks every quarter…it’s a great little strategy for those who don’t like to short sell.
Here’s a good overview from astudent as to what earnings season is all about:
Earnings season is starting again, so everybody should be paying close attention to dates and trading ahead of earnings releases. The goal is too look for opportunities to go long or short before or after earnings. That is a lot of stocks to monitor regularly. Earnings season can be a lucrative time for traders, but it can be a very productive time for the number of hours you spend. Since the earnings calendar dictates where you spend your time it is easier than casting random lines through screens to find stocks worth trading. To get back to some basics and refresh memories lets go over some potential earnings scenarios.
Download the key points of this post as PDF.
Earnings beat, meet or miss
These are the most basic time of earnings results. The reactions to each of them is pretty basic, except for meet. Meeting an earnings target has become a negative event, because companies are supposed to beat. A meet can be a positive catalyst if a miss was heavily priced in. This could be due to macroeconomic factors or a well-timed negative article.
An earnings miss usually leads to a sell-off. There is very little the company can say to make the stock go the other way on an earnings miss. There are multiple kinds of beats and misses. First is the company’s projection and the second is the prediction of financial analysts. Generally the market focuses long so the company wants to beat, whichever projection is higher. Misses can be trickier. If the company misses expectations of analysts but beats its own it usually suffers, but not always. Generally financial analysts control, unless the company is projecting higher which almost never happens.
An earnings beat often leads to a buying spree on the stock even if it was up prior to earnings. How much it was up determines the amount of time that it stays up after the earnings release. Rarely will a straight beat on earnings result in a decline, unless the company said something very bad. The company’s guidance is of massive importance and puts another layer on top of earnings.
Guidance up or down
Guidance is another thing that is about trying to hit a target that analysts set up. Companies usually give quarterly guidance and annual guidance. The latter is changed as quarterly guidance expectations shift. There is a range that analysts determine and the company should fall within or surpass this range. Falling within the range ends up mattering far less than promising more or less.
When there is strong guidance a stock can really rally even if results come in a bit soft. Guidance has been a major mover for the market lately, mostly because expectations are low and people are expecting things to be so bad eventually. Also with so much cheap money it is hard to see what companies are good and which ones are bloated. Guidance helps identify companies that have long-term potential. For traders the long-term potential is not critical. However, a lot of people saw 10 years wiped out when the financial crisis hit. The long-term picture has become a mantra for people in their 30s and 40s that might find the next collapse during their retirement. So strong forward guidance screams buy to them.
Conversely, having very tepid guidance is a red flag. It means that the company is slipping or its industry is hitting hard times. The fear takes over and companies collapse. Consider VMWare over a year ago when it announced the next few years would be weak, while the years after that would be strong. The company was already highly valued so it collapsed, but the news of gains further down did not win many fans. It is a weird thing about the recent psychology. Everyone wants the long-term story, but now and later. It is not good to have a lull and benefits later. Mostly because people do not seem to trust it. Two or three years is enough time for things to change for the worse.
Once these things take effect a stock can run or decline. The moves can be massive, and unjustified. Once the stock is screaming oversold or overbought you can take your position. You are going against the herd, because the herd jerks too much into one direction. It needs to ease back onto the average path. The direction might be up or down, but the price is rarely right at the sane level. There are too many market players to achieve that level. A stock either goes too high or too low relative to the “correct” value. Once news comes rushing in there is an opportunity there.
You can agree with the herd as well, but it is so much easier to spot something absurd than it is to peg a normal stock. If a stock is up 40% on the day it might be time for it to pullback a little. If a stock is up 8% whose to say if it is due for a decline or will continue its rise consistently. By working hard during the quarterly earnings weeks you can get a lot done, and exploit a lot of trading opportunities. This allows you to work at a lower intensity looking for optimal set ups between quarters. Since the catalysts are scheduled you have one fixed point in a world where very few things are fixed.