In an article I published on January 25th, I explained that a few stocks are exceptionally well positioned for shorting on earnings reports. This is due to a robust and consistent decrease in share price on the day following earnings, regardless of whether the company missed or beat its earnings estimates.
Since we have no viable way of knowing in advance whether a company will miss or beat expectations, our main profitable focus is on finding a stock that has shown a consistent move, over years, in price on the day following earnings, whether or not the company missed or beat estimates.
One of those short candidates was Atwood Oceanics (ATW). We opened our short position last night at the close, right before earnings announcement, at the price of $46.90 with a limit at $44. We placed our stop loss at $48.95, which is 5 cents above the stock's 52-week high, in case the movement is not in our favor and the share enjoys a strong ride upwards.
As you recall, this strategy is all about trading the stock on the day following the earnings announcement. Hence, the short must be opened prior to the announcement and closed on the trading day following the announcement. It has proven to be a robust and profitable strategy for a number of stocks. One of them was ATW.
On average, analysts were expecting the company to report $1.01 a share during the fourth quarter on revenue of $185M, which represents an increase of approximately 30% from the same quarter last year.
Atwood Oceanics announced earnings last night after the close of $1.00 per diluted share, on revenues of $184M for the quarter ended December 31, 2011. This represents a slight miss of previous expectations.
Nevertheless, the stock got punished and it is currently down by more than 2% on the news.
My recommendation is to Buy To Cover the short position in ATW, up to the price of yesterday's high, $46.90. This will leave a profit of 2.5% overnight.
Do not maintain a short position after the close tonight.
Disclosure: I have no positions in any stocks mentioned, but may initiate a short position in ATW over the next 72 hours.