To Trade or Not to Trade: Ross Stores Earnings Preview

Mar.16.11 | About: Ross Stores, (ROST)

Ross Stores (NASDAQ:ROST) reports fiscal fourth quarter earnings on Thursday, March 17, before market open. The whisper number is $1.39, two cents ahead of the analysts' estimates. Ross Stores has exceeded the whisper number in 21 of the 26 earnings reports we have data.

Trading on an earnings event requires an understanding of post earnings price movement, both after hours and intra-day. We'll take a look at the average post earnings price movement, when those moves occur, and if Ross Stores presents an earnings trade opportunity.

Since Ross Stores reports earnings before market open, it's important to look at regular hours trading price movement following the earnings release. The average price move during next available intra-day trading (market open to market close) for the past four quarters is +0.4%. Obviously a limited but positive price move. The average price move within five trading days for the past four quarters following its earnings reports is +1.6%. Another limited but positive price move.

Longer term earnings analysis (last four years of earnings) shows the company tends to see (on average) price movement of -0.6% (intra-day) in one trading day following an earnings report, and +1.5% in five trading days. These present limited but inconsistent price moves.

Ross Stores has topped the whisper number in the past three out of four quarters by an average of 1 cent, but short term (one to five trading days) it lacks a consistent price reaction to the whisper number. Where the company has seen greater consistency is within a 25 day trading period following earnings (meaning a greater likelihood of seeing strength when it beats the whisper number, and weakness when it misses). The average price move in 25 trading days when beating the whisper number is +7.1%.

The majority of investors polled are expecting the company to provide a positive outlook:

  • Positive 80.0%
  • Neutral 10.0%
  • Negative 0.0%

Ross Stores' earnings have historically given investors a positive surprise as they have exceeded investor expectations more times than missed:

  • Beat whisper: 21 qtrs
  • Met whisper: 0 qtrs
  • Missed whisper: 5 qtrs

Summary: The whisper number is showing some investor confidence this quarter as it is two cents higher than the analysts estimates. The average price movement (either intra-day, long term, or short term analysis) is limited and positive, but inconsistent through five trading days. There is a great deal of confidence from investors for the next quarter's outlook. But most important is that the company is a consistent reactor within a 25 post earnings period when they report earnings that beat the whisper number. Data indicates Ross Stores presents a viable short term trading opportunity (long or short depending on whether or not they beat or miss the whisper number), with the strongest price reaction expected within 25 trading days following the report.

When analyzing the data we collect, the most important aspects are how a company reacts to beating or missing the whisper number, the average post earnings price movement, and in what timeframe. Keep in mind that trading on whispers is a technical play on market psychology, rather than a bet on a company's fundamental strengths.

A company's "reaction" to the whisper number expectation is the key - on average companies that exceed the whisper are "rewarded," while companies that miss are "punished" following an earnings report.

Companies that exceed both the whisper number (from WhisperNumber.com) and the analysts estimate see a 2.5 times greater positive post earnings price move than companies that only exceed the analysts estimate but miss the whisper.

The whisper number is derived from an average of individual investors, floor traders, investment advisors and market strategists' expectations regarding earnings for the most recent quarter.

Disclosure: I have no positions in any stocks mentioned, and no plans to initiate any positions within the next 72 hours.