Can You Profit from Trading the Earnings Season?

Four times a year there is a confluence of corporate earnings reports. It can create turbulence for the overall market as well as the individual stocks. Is there anything we can do to take advantage of this avalanche of breaking news? We have advice from several experts, and some special resources.

Trading Tips for Earnings Season

• Fidelity Investments offers a comprehensive guide, beginning with your own earnings forecast.
• Investopedia also has an overview of strategies.
• Goldman Sachs shares ideas for playing the current low volatility. While the examples are from last quarter, the concept is easily updated. We looked today at the weekly options in JP Morgan (JPM). Earnings are out tomorrow morning, and the options expire in the afternoon. Today you could have bought an ATM straddle. (If you do not know what that means, you should not be trying it). It would have cost about $1.80. Based upon the last three earnings reports, you might have made money on a play like this, but you would need to be agile and accurate in trading the announcement.
• Investor’s Business Daily
  suggests swing trading based upon technical analysis.
• Zacks
  suggests making a directional play based upon your expectations (and their research).

These are all helpful, but overlapping tips. Organizing by strategy, we get the following:

• Directional – stock or options.
• Volatility – option plays.
• Follow the initial reaction – hoping the “dumb money” is slower.

As always, I’ll share my own observations in the conclusion, along with the top resources I use.

Expert Picks from the Models

This week’s choices include several market sectors.

Holmes: This week, I picked up Anheuser- Busch InBev SA/NV (BUD), the Belgium-based brewing company. Leading into last October, the stock was inching up just above the $132-level. Then, within a one-month period from October into November, it had three huge declines down to around $102. For the next six to seven-month period, the stock has been making very small and steady attempts to pick itself up again. In May, on its recovery phase, the stock prices touched decent levels up and around $ 117.50. In June and July, the stock saw some declines in combination with short upsides. I figure that the stock has still more to gain on its recovery and as always, I buy on the dip. The 50-day average cutting above the 200-day average in a “Golden Cross” also shows more upward support for the stock price.

Jeff: I am still struggling with the “Belgium-based.” Isn’t this the company of Clydesdales and Christmas Cards?

H: Those emotional factors are not part of my analysis. Look at the chart.

J: Do you know when the earnings will be released?

H: I don’t know, and I don’t care.

J: For those who do care, Nasdaq.com reports:

Anheuser-Busch Inbev SA is expected* to report earnings on 07/27/2017 before market open. The report will be for the fiscal Quarter ending Jun 2017. According to Zacks Investment Research, based on 1 analysts’ forecasts, the consensus EPS forecast for the quarter is $1.14. The reported EPS for the same quarter last year was $1.06.

H: I hope that humans are happy with the announcement. I see limited downside, and plenty of potential.

Athena: My featured stock this week is Restoration Hardware (RH), in the home furnishings market. Talking of the “Golden Cross”, well, my stock saw it too in mid-March and followed with an upward spike. Looking at the chart history. The start of the year was weak, with a fall from just around 40 to the 30’s mark in late December. The further decline from Jan-March included a touch 25. The stock’s late-March recovery saw it gain around 50% to come close to the 60’s mark in mid-May. Then, the stock had a correction in May, followed again by its upward march in June-July. I expect the rally to continue.

J: Didn’t we try this stock a couple of months ago – a Road Runner pick?

A: I pay no attention to that noisy bird.

J: I think we caught the decline, and sold too soon. The earnings report was on 6/1.

A: Whatever happened before, it is attractive right now. I suppose you are about to invoke the guru of the fundamentals, Chuck Carnevale.

J: An excellent guess! I believe I warned the Road Runner about this as well.

Oscar: This week’s pick feels appropriate for these hot, hot summer days. I’m getting into the solar energy sector, shown here as the Guggenheim ETF TAN. I have to say, stocks in this sector are climbing like the late afternoon heat. Let’s take a closer look:

The last twelve months were not especially kind. Beginning in mid-October, the solar stocks took a big nosedive. They seem to have bottomed out at the end of 2016, and they’ve been on the road to recovery for this calendar year. This ETF is trading above its 200 and 50 day moving averages, which suggests to me the gains are real. As usual, I’m looking to hold onto stocks in this area for a 2-4 weeks. 

J: This is an interesting choice. Are you monitoring President Trump’s energy policy decisions?

O: My focus on DC is mostly on the Nationals.

J: That is what I thought. With the liberalization of pipelines, there might be a threat to alternative energy.

O: It is all about the numbers. Take a look at today’s Racing Form and I will explain.

J: Forget that. Let’s talk about your readers. Do you have updated rankings for them?

O: Yes. Here they are. If they send more ideas, I will rank them.

Felix: DDR Corporation (DDR) may seem riskier than my usual pick, but I have my reasons. I admit the trailing 12-month decline is not pretty. At the same time, I think this one bottomed out midway through May. Focus on the last couple months of this chart.

A little variation around that price range is attractive to me for a couple reasons. First things first, the flattening curve on the 50-day moving average suggests to me that we’re past the point of another big drop.

Second, I’m in it for the long haul. I don’t mind a few weeks middling around the $9/share range if the 3-4-month upside is as much as 25%.

J: Do you understand that this is a REIT? The value depends upon many factors, including cash flow, payout ratio, interest rates, and the market for the underlying real estate. I am just getting started.

F: Those factors might be interesting for income investors. I just consider the chart – which looks very appealing. I expect this to be a long-term hold.

J: How about your individual stock ratings?

F: I have reported those. I need my fans to keep the requests coming!

Conclusion

Trading the earnings season has special risks, but also special rewards. There are many important factors to consider. Here are some special resources:

1. Expectations and the whisper number

   1. Analyst summary – Nasdaq citing Zacks.
   2. Whisper number, the unstated expectations that differ from the official analyst calls – whisper.com.
   3. Detailed preview, only available from top sources. Check out Brian Gilmartin’s take on MSFT.
2. Revenue. In the current environment companies are expected to show revenue growth, beating expectations.
3. Outlook. A good number this quarter is not enough if the outlook is poor.
4. Quality of earnings. Even when everything seems fine, many will complain that earnings growth is somehow contrived. It is more than just numbers. What is the “organic growth?” Or the sales in a key product line?
5. Conference call. Usually this is scripted, but stocks can react dramatically during the call.

Stocks can make big moves on any of these things. There may be a pattern like this:

Trading algorithms –à Human traders –à Individual investors

This is a sequence where algos and traders do not need to be right on the fundamentals. They are profitable just by getting the initial reaction right. After-hours trading is often wildly deviant from what we see the next day. Analysts participate in the conference call and file their reports. This is especially significant for large institutional investors.

How can an individual have an edge? 

I have traded earnings for decades. It is tougher now than ever before. You cannot outrace the algos, nor can you digest all relevant factors that quickly. The option volatility is normally a good reflection of potential moves. If you have an edge, it must come from better information – how much the stock can move, a good sense of a positive or negative surprise, or excellent fundamental background.

Prepare well, and make sure that the size of your play reflects your actual edge!

Here is a summary of the cast of our characters. Find your own favorite! 

Stock Exchange Character Guide

Background on the Stock Exchange

Each week Felix and Oscar host a poker game for some of their friends. Since they are all traders they love to discuss their best current ideas before the game starts. They like to call this their “Stock Exchange.” (Check it out for more background). Their methods are excellent, as you know if you have been following the series. Since the time frames and risk profiles differ, so do the stock ideas. You get to be a fly on the wall from my report. I am usually the only human present, and the only one using any fundamental analysis.

The result? Several expert ideas each week from traders, and a brief comment on the fundamentals from the human investor. The models are named to make it easy to remember their trading personalities.