October 13, 2013 - 3 Strategies to Profit this Earnings Season by Zacks Investment Research
Nothing better than waking up to a positive earnings surprise and big profits.
Nothing worse than waking up to an earnings miss and heavy losses in your portfolio.
Well October earnings season is about to kick into full gear and there are few things that move a stock faster, up or down, than an earnings announcement.
This is especially true now, as investors are very concerned about the state of earnings growth. In fact, last quarter there was virtually no profit growth after you remove the bank stocks.
Thus, companies that disappoint this earnings season will be crushed. This will lead to devastating losses for those unfortunate shareholders. However, the owners of stocks with positive surprises will be richly rewarded. Now is the perfect time to align your portfolio to profit in the month ahead.
As most of you already know, Zacks Investment Research specializes in the coverage of corporate earnings. And more importantly, how to profit from this information. So, today I'm going to share with you 3 proven strategies to profit from earnings announcements.
(Hint: Be sure to read to the end as the 3rd strategy is by far the most profitable.)
Strategy 1: Four Leading Indicators of Positive Earnings Surprises
I figured it's best to get the most obvious strategy out of the way first. The 4 leading indicators I refer to are the 4 factors of the Zacks Rank. Before you skip this section, let me share some information that you may not have known.
In the mid-1970s Len Zacks took his mathematical skills to Wall Street where his job was to discover stock picking strategies that would beat the market. He had a simple theory that was the precursor to what became the Zacks Rank.
Len focused his research on finding stocks that were more likely to have a positive earnings surprise and jump on the news. The journey led him to what we know as the 4 factors of the Zacks Rank. Each individually increases the odds of owning stocks that will enjoy a positive earnings surprise.
However, when you combine them together inside the Zacks Rank, it becomes an almost obscene advantage for investors.
Strategy 2: Stop the Bleeding
This second strategy is so simple, yet so hard for most investors to do. So, I'm going to beat it into your head...for your own good of course ;-)
Sell All Companies with a Negative Earnings Surprise
Yes, sell it immediately. Even after it falls at the open. Even if it is for a substantial loss. Why? Better to take a 5-10% loss in the short run than a 20% to 40% loss in the long run.
Keep in mind how earnings estimates are created. Both company executives and brokerage analysts are doing their best to create conservative estimates that the company should easily beat. And when they fall short of those watered down estimates then it points to one of two serious problems.
Industry conditions have deteriorated and thus they missed their forecasts. This problem will most likely not correct itself in the near-term, leading to further disappointment.
Company leaders are incompetent. Meaning that they are no good at estimating their own earnings. Or that their strategies for growth are ineffective.
Either reason should give you ample cause to abandon the stock now and move on to greener pastures.
Strategy 3: Harness Real "Earnings Whispers"
Consider the following chain of logic.
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 the analyst has at their disposal to put 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 have a DARN 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 Earnings Whisper Stocks?
We can't share all the details of our proprietary whisper formula with you, but our 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.