2016 Best and Worst Earnings Trades in Review

Earnings season kicks off next week and that means a whole new round of trading opportunities. We've been analyzing historical post earnings price movement for over eighteen years and believe that trading on earnings reports continues to be a consistent and profitable strategy.

There are a few ways to trade earnings events - pre-earnings, which we believe is a guessing game, and post earnings, when you can use the actual reported earnings number against the whisper number expectation as the catalyst for a long or short position. 

This article will present our biggest earnings trade winners...and losers, from 2016, and we'll hope to offer some insight and potential earnings trades for 2017.

Winners

Hovnanian

Hovnanian (HOV) reported earnings short of the whisper number in the first three quarters of 2016, and finally reported a beat in the fourth quarter. Three short trade positions and one long, and all four were winners with an average return of 14%. The long position in December provided the best returns of 22%. Hovnanian tops our list in 2016 of best and most consistent earnings trades.

KB Homes

KB Homes (KBH) comes in a close second on our list of winners as we only had three quarters of activity. The company reported earnings short of the whisper number in the first quarter of 2016, but topped it in the following two quarters. One short trade position and two long positions yielded three winning trades with an average return of 5.7%. 

Fiserv

Fiserv (FISV) also had three winning trades in 2016, and all three were long positions. The company reported earnings that topped the whisper number in three quarters, and reported earnings in-line with the whisper in one quarter. The three trades yielded returns of 0.9%, 7.6%, and 12.3%. Fiserv would have taken the second spot on our list, but the returns (as noted) were inconsistent.

Sprint

Sprint (S) is on the list for a few reasons, the top being big percentage earnings returns. It's a cheap stock that sees big moves after an earnings report, and 2016 was no exception. The first three quarters yielded winners, and the fourth quarter turned against us. But those three winning (long) trades saw an average return of 17%. The company reported earnings short of the whisper number in the fourth quarter and the short trade position took back 9.1%. If it weren't for that last trade, Sprint would have easily been in our top spot.

Rowan

Rowan (RDC) gets a special mention as our biggest single positive move. The company reported earnings in late February that topped the whisper number. Our analysis expected a positive price move of +6% in fifteen trading days...what we got was a +29% move in that same period. A few others came close (PNC Financial +24%, Hovnanian +22%, Time Warner +22%) but Rowan takes the top spot for single biggest positive move on an earnings trade.

Losers

We need to provide some additional insight with our losers data. We place a 6% stop loss on all positions, so any losses are (obviously) capped at 6%. This category provides data based on actual price movement ignoring the stop loss.

Macy's

Macy's (M) earns the top spot in our losers list as the company beat the whisper number in three quarters...and that meant three long position trades...but the stock moved against us in all three trades. The average trade loss comes in at 8%. Macy's tops our list in 2016 of worst and most inconsistent earnings trade.

Lowe's

Lowe's (LOW) comes in at a close second, but with short position losers. Lowe's reported earnings in three quarters that were short of the whisper number, and our data indicated taking three short positions. The stock, however, moved higher on all three trades, and saw an average trade loss of 6%.

JC Penney

JC Penney (JCP) comes in third place with a record of one win and three losses. The company reported inconsistent earnings in 2016, beating the whisper number twice and missing twice. The one winning quarter (long position) saw a return of 10%, but the three losing quarters (two short positions, one long) saw average losses of 7%.

Cigna

We weren't sure whether or not to include Cigna (CI), but with a record of no wins and two (big) losses we felt it deserved a fourth place position. One long position in May yielded a 6% loss, and one short position in November yielded a 15% loss. Chevron and Agilent Tech were contenders (each with records of one win, three losses), but Cigna rounds out our losers with a shut out.

Joy Global

Joy Global (JOY) gets special mention as our biggest single negative move. The company reported earnings in early March that fell short of the whisper number. Our analysis expected a negative price move of 11% in fifteen trading days...what we got was a positive price move of 18% in that same period. Joy Global takes the top spot for single biggest negative move on an earnings trade.

A number of these companies will remain on our watch list in 2017, and a number of them (we're looking at you Macy's and Lowe's) won't. While they may be good long term investment bets, they aren't good short term earnings trades (for now).

About the Data

We've been collecting earnings expectations and analyzing earnings price reactions for over eighteen years. The whisper number data collected and published by WhisperNumber.com continues to provide greater returns when used as an investment vehicle, and has a greater impact on stock movement than analysts consensus estimates. 

The premise of our analysis is simple: more often than not when a company misses the whisper number the stock is basically 'punished' and will see a decline in price over a one to thirty day period after earnings are released. And on average when a company beats the whisper the stock is rewarded and will see gains over a one to thirty day period after earnings are released.

All trades listed above were from our Whisper Reactors trade alerts service. Not all companies qualify as a Whisper Reactor - only those companies that show a high probability of reacting to the whisper number qualify. Our analysis looks at the past four years of earnings reports and only provides those companies that have a 70% or greater historical probability of reacting to the whisper number as expected (move higher when they beat the whisper, and lower when they miss.)