Earnings season is, by definition, a highly volatile period. You never know for sure whether it is a friend or a foe of your trading account until it is over. Making money in this time period could indeed be a highly challenging and frustrating endeavor.
This is why we always need proper trading tools and a coherent strategy. In an article I published at the beginning of this current earnings season, I offered such a strategy which aims to take advantage of profitable short candidates.
I indicated a few companies which have consistently shown a proven track record of a robust decrease in price the next day following an earnings announcement. We shorted these stocks prior to the earnings announcement, placed our stops, and bought to cover immediately after the announcement.
My strategy picked the following companies. These are the results:
|Name||Price||P/E||Report Date||Positive % Report days||Average Report Day % Change||Actual stock performance on the following day|
|Sealy Corp. (ZZ)||$1.6||N/A||1/18/12||0%||-3.5%||-17%|
|Atwood Oceanics (NYSE:ATW)||$45||10.85||2/1/12||0%||-4.55%||-2%|
|InterMune Inc. (NASDAQ:ITMN)||$14.36||8.9||2/16/12||0%||-4.84%||-6%|
|Eaton Vance Corp (NYSE:EV)||$25.8||14.7||2/22/12||0%||-4.43%||-1.4%|
If you invested $10,000 at the start of this earnings season and just kept compounding it, you would be sitting on $12,980 today, trading commissions not included. A return of almost 30% is abnormally high, especially when taking into consideration the following three factors:
- Our effective TTT (total trade time) was miniscule. I remind you that we entered the position on the day prior to the earnings announcement and bought to cover on the day following the announcement. Hence, our TTT for this month in whole remained under eight days.
- February was a relatively strong month for equities. The general market advanced by 4.4% from January 18th up to the end of February. Making money by shorting stocks during a bull market is even more challenging.
- Our returns were made by placing relatively tight stops. Normally, our stops were placed at a price 2% higher than the closing price prior to the earnings announcement.
In conclusion, this was a lucrative earnings season for us. Follow me as I publish our next list of short candidates prior to the next earnings season.