Jim Cramer always preaches how an investor should purchase equities or add to existing positions after the earnings release, not before. Very true, however, if you are a short term trader, a strategy I found useful is to trade in and out of a stock 2-4 business days before the earnings release. Why not make a short term profit before deciding to go in long term after the earnings report date?
At times, the "prior to earnings" volume increases and the PPS move is pretty indicative as to how the earnings will turnout, but not always. I can't count how many times there was a major sell-off few days prior to earnings, then company beats analyst estimates and bears scatter into the woods before the opening bell the next day. Opposite also holds true, a perfect example would be Apple's (AAPL) last quarter earnings results. From October 13th to October 14th Apple rose from $408 to $422 a share with subsequent 5 million shares per day increase of volume accumulation before tumbling after missed earnings. I did make a gain on that strategy trade, but went against my discipline and held some shares through earnings day by putting all my faith on the tech giant's consecutive and flawless earnings history. Enough about me, let us take a look at some names that report this week and the possible gain that one could have captured in trading prior to earnings.
|Company||Average Volume||Entry Date/Price||Exit Date/Price||Gain||Earnings Date|
|Dollar General (DG)||1,310,000||Nov. 29 $39.01||Dec. 1 $40.64||4.17%||Dec. 5|
|Analogic Corp. (ALOG)||65,742||Nov. 30 $52.29||Dec. 2 $56.64||8.32%||Dec. 8|
|Bank of Montreal (BMO)||906,525||Nov. 29 $55.20||Nov.30 $58.76||6.45%||Dec. 6|
|Casey's General Stores (CASY)||233,071||Nov. 30 $51.04||Dec. 1 $53.99||5.78%||Dec. 7|
|Auto Zone Inc. (AZO)||269,562||Nov. 29 $323.05||Dec. 1 $334.22||3.46%||Dec. 6|
|SAIC, Inc. (SAI)||2,120,000||Nov. 30 $11.77||Dec. 1 $12.14||3.14%||Dec. 6|
Nobody knows how the earnings will turn out, but when the insiders and investors consensus cheer with optimism prior to reporting, you may detect that in robust volume and change in PPS, as well as accumulation/distribution line. Scan stocks that report earnings in a couple of days from now and watch them like a hawk until earnings day to get a good practice on the strategy, but remember to stay on sidelines during that conference call.
Disclosure: I have no positions in any stocks mentioned, and no plans to initiate any positions within the next 72 hours.