If you thought the Election was important, just wait until this earnings season begins. Stocks have run up to all-time highs, with many industries pushing up to record valuations. Meanwhile, there is a clear shift in policy on Capitol Hill, which will lead to the demise of some stocks, while it simultaneously becomes rocket fuel for others. The ultimate measuring stick for stocks is earnings. Those stocks that deliver will no doubt see huge inflows, while those that miss, especially those in the wrong industries, will be severely punished.
That is the story for the overall market. As for individual stocks, there will be big winners and losers depending on the strength of their reports. This brings to mind one of the most confusing things about earnings season:
Why do some stocks fall off a cliff on a positive earnings surprise while others skyrocket?
In this article we are going to tackle this little understood issue. Better yet, I will share with you two ways to pursue substantial profits from surprises this earnings season. More on that later. First . . .
3 Reasons Stocks Can Drop After a Positive Earnings Surprise
1) Estimates vs. Overly High Expectations: The standard definition of an earnings surprise is when actual earnings comes in higher than earnings estimates. But those estimates are the “published” numbers from the brokerage analysts. Quite often investors tend to develop their own unique set of expectations that can differ greatly from the Wall Street analysts. If there is too much optimism ahead of the release, then actual earnings will need to be a blowout in order to appease investors inflated expectations. This is the most common reason why some stocks fall after a “supposed” earnings beat.
2) Poor Quality of Earnings: The highest quality earnings come from having robust revenue growth. This means that the company’s products or services are in high demand and should stay that way into the future. However, these days far too much of the earnings being reported is generated from cost cutting and other “accounting gimmickry”. The problem with that is that the benefits of these moves don’t last. When the market gets a whiff that the earnings are unsustainable, no matter how strong the beat, shares will most likely drop.
More . . .
4 Stocks to Buy BEFORE They Report Earnings
In the coming week, 112 companies will report earnings. What if you could know – in advance – a tight selection of the very best stocks that will exceed earnings expectations?
Now you can. This precious intel comes from Zacks' "ESP" (Earnings Surprise Prediction) formula that catches positive surprises with previously unthinkable 80.21% accuracy. Our system has recently led to gains as high as +70.9% in as little as 5 days.¹
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3) Negative Forward Guidance: Plain and simple, when you buy a stock you are taking an ownership stake. And what owners of companies care about is the stream of future earnings. So if a company beats earnings for the quarter just reported, but warns that future quarters will see lower earnings, then that stock will go down…and go down fast.
2 Ways to Make Money on Earnings Surprises
So now that we have outlined things that can go wrong after an earnings surprise, let's shift gears and talk about something even more important; How to turn a profit from earnings surprises. Here are two ways to go about it.
Good Way: Buy shares in any company that had an earnings surprise and rose the day following the news. These stocks experience what academics call the "Post Earnings Announcement Drift". Studies clearly show that these stocks usually outperform the market over the next 9 months. Conversely, you should sell any stock in your portfolio that misses its earnings numbers as it likely to underperform the market for the next few quarters. The downside of this approach is that there are literally thousands of stocks to choose from every quarter.
Best Way: Find stocks where the earnings “whispers” tip you off that a big surprise is coming. Buy the shares shortly before the announcement and enjoy quick gains of 10%, 15%, 20% when the earnings surprise is officially reported.
I know what you’re thinking. There are no Magic 8-balls for the stock market, so how can this be possible??? But fret not; this isn’t a magic show. It’s pure science.
The concept of finding a profitable source of earnings whispers has long been the Holy Grail of stock investing. Many experts have tried and failed to make this work. In fact, we had been researching this for countless years.
Early on we found clues that told us stocks more likely to surprise, but not necessarily rise in price. It wasn’t until the summer of 2010 that we discovered the right combination of elements. Since refinements were made in 2014, the system has correctly called POSITIVE surprises a whopping 80.21% of the time with the vast majority accelerating in price.
Where to Find These Stocks
We can’t share all the details of the formula with you, but the system relies on two under-used criteria coming from the brokerage analyst community. These two factors 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.
If you would like to get in on strong potential profits every earnings season, and are ready to jump quickly on the positive surprises this strategy turns up, then I invite you to look inside our Surprise Trader portfolio.
This is the time to do it. Right now, "Positive Surprise" signals are flashing for 4 select companies that are reporting earnings this coming week. Here's the timeline:
• Deadline to get into the portfolio is midnight Sunday, January 17.
• 3 new surprise stocks are in the portfolio now.
• 1 more will be posted Tuesday morning when the market reopens after the holiday.
• Those 4 companies report earnings starting Tuesday after the market closes.
Don't miss your chance to beat Wall Street to the punch and make the most of the potential double-digit price pops. Remember, our signals predict big positive surprises and they've been right a remarkably consistent 80.21% of the time!.
In fact, our Surprise Trader portfolio has recently closed gains of +70.9%, +43.6%, +46.6%, +49.3%, and +62.6% in as little as 5 days.¹ So if you’d like to pursue quick, substantial profits this earnings season, and are ready to move on the positive surprises we’re predicting, then come on and join us.
Bonus: Today you may download our "Early Warning Alert" report free. It reveals Stocks to Sell BEFORE They Report Earnings in the Coming Weeks. Our strategy works both ways, and you can use this report to avoid companies that are likely to report the worst negative surprises.
Don't delay. We can't let too many share our "surprise" recommendations, so they are generally closed to the public. Today the portfolio is briefly open again, but your chance to gain access ends midnight Sunday, January 17.
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Wishing you great financial success,
Dave Bartosiak is Zacks' resident earnings surprise and momentum expert. He selects stocks and delivers daily commentary for our Surprise Trader portfolio.
¹ The results listed above are not (or may not be) representative of the performance of all selections made by Zacks Investment Research's newsletter editors and may represent the partial close of a position.