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April 09, 2011 - When a Earnings Whisper Becomes a Scream
By: Steve Reitmeister of Zacks Investment Research
"At the end of the day, all stock price movements can be traced back to earnings."
Read that last line again...so it sticks!
The reason it's true is because when investors buy shares in a stock, they are actually buying part ownership in that company. And owners of companies, big and small, are most concerned with the earnings they will generate in the years to come.
With earnings being of such central importance is why earnings season is such a critical time for investors. If the companies you own have good news, then their stocks will immediately jump higher. Unfortunately, if your companies disappoint, they will gap down HARD and you will be handed stiff losses.
Not surprisingly investors have long sought a reliable "whisper number" they could use before companies report earnings. Truly, this would be the Holy Grail of investing. With that information in hand, an investor would have a portfolio that lights up like a Christmas tree every earnings season.
Our research team has spent many long years in the hunt for this coveted "whisper number" and it is with great pleasure that I can say: WE FOUND IT!!!
Below I will detail what we discovered and, better yet, how you can profit from these whispers this earnings season...and every earnings season thereafter.
Pushing Ahead When All Others Have Failed
Nobody understands earnings data more than Len Zacks. Remember he is the one who uncovered the power of earnings estimate revisions that is the cornerstone of the Zacks Rank for stocks and its +28% annual returns.
So I met with him over three years ago to start this project to find a reliable earnings whisper number. He told me not to waste my time.
Why? He cited numerous such projects undertaken by other leading researchers over the years. Each time they tried and failed.
In fact he shared with me his previous efforts that also ended in futility. He said emphatically, "Steve, I can tell you with 70% accuracy which stocks are more likely to beat estimates. But beating estimates and the share price moving higher are two very different things."
Certainly you know what he's saying. How many times have you owned a stock that supposedly beat estimates and yet the price went down afterwards? (Too many times is the answer...we've all been there).
I pleaded with him to try once again. He begrudgingly accepted the challenge with the help of others here at Zacks, like Kevin Matras, who have developed many of our most profitable trading strategies.
There was very little success early on. None of the new theories were panning out. Yet the toughest part was to get sufficient new data points in place to test. When this new class of earnings data was finally installed this past summer, then things got real interesting.
The Discovery of These "Whispers"
What finally got us on the right track was going back to the basics of the earnings estimate philosophy at the heart of the Zacks Rank. Here are the clues:
* Earnings estimates come from brokerage firm stock analysts.
* These analysts are highly motivated to create conservative estimates that can easily be beat. Why? If they have a Buy rating on a stock, and the estimates are too high, then the stock is more likely to disappoint. This would send the stock price lower and the performance on their stock ratings would be poor (leading to lower compensation).
* The closer to earnings season we get, the more accurate the information that goes into the estimate.
Add it all up and there is no good reason for an analyst to create a higher estimate close to the date of the earnings report unless they had a DAMN GOOD REASON. Focusing in on those estimates closest to the earnings announcement is where we found the "whisper that becomes a scream"...a clear indication from the analyst community of stocks more likely to beat earnings by a wide margin. And most importantly, rise on that news.
Where to Find These Stocks
We can't share all the details of the secret formula with you, but the new system relies on two under-utilized signals coming from the brokerage analyst community. These two whispers are then layered on top of other time-tested elements such as the Zacks Rank and Zacks Industry Rank to find only the best stocks in the best industries to profit from each earnings season.
If you would like to receive our precise whisper trading signals in the future, then we invite you to become a member of our most promising service in years. But a word of caution. The response to it was so overwhelming we've had to close it to new investors. Open temporarily, it will close again Sunday, April 10. Don't delay. Click the link below:
Wishing you great financial success,
Steve Reitmeister has been with Zacks since 1999 and currently serves as the Executive Vice President in charge of Zacks and all of its leading products for individual investors. After many long years of research, he is extremely proud to share with you our breakthrough for investors, the Zacks Whisper Trader.
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