3 Secrets to Quick Profits this Earnings Season
The best mornings are the ones where you wake up to a positive earnings surprise and big profits.
The worst mornings are the ones where you wake up to an earnings miss and heavy losses.
The country is restless following quarantine and with earnings season kicking into full gear there is nothing than can move a stock faster, up or down, than an earnings announcement.
This is especially true now given the stock market is balancing a shift towards the Stay Home Economy along with a very accommodating Fed. Any stocks unfortunate enough to hiccup this earnings season will be severely punished. This will lead to devastating losses for those unlucky shareholders. However, the owners of stocks with positive surprises will be richly rewarded. So now is the perfect time to align your portfolio to profit in the month ahead.
You should 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
The most obvious strategy is the reason we are all here. 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 with you 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.
More . . .
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Strategy 2: Stop the Bleeding
This second strategy is simple, yet hard for most investors to do. So, I'm going to repeat it again and again...until I wear out the words!
Sell All Companies with a Negative Earnings Surprise!
Yes. Immediately. Do Not Pass Go. Do Not Collect $200. Sell! 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 do their best to create conservative estimates that the company should easily beat. It's all about lowering the bar. So when a company falls short of those watered-down estimates it points to one of two serious problems:
• Industry conditions have deteriorated and thus they missed their forecasts. This problem most likely will not correct itself in the near-term, leading to further disappointment.
• Management is incompetent. Meaning that they are clueless when it comes to estimating their own earnings. Or growth strategies are simply ineffective.
Either reason is enough cause to abandon the stock immediately and move on to greener pastures.
Strategy 3: Harness Real "Earnings Whispers"
Consider the following chain of logic:
• Wall Street analysts create earnings estimates.
• 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 for the analysts).
• The closer to earnings season we get, the more accurate the information the analyst has at their disposal to put into the estimate since there is less time left to estimate performance.
Add it all up and there is no good reason for an analyst to increase estimates close to the date of the earnings report unless they had a DARN GOOD REASON. Focusing on those estimates closest to the earnings announcement is where we've 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.
How to Catch the Best Earnings Whisper Stocks EARLY
I can't share all the details of the secret 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... with the best chances of beating earnings and quickly rising in price.
If you would like to receive our precise whisper trading signals through the heart of this earnings season, I invite you to check out our Zacks Surprise Trader.
This is the time to do it. Right now, "Positive Surprise" signals are flashing for 5 select companies that are reporting earnings this coming week. Here's the timeline:
• Deadline to get into the portfolio is midnight Sunday, July 19.
• 5 surprise stocks were recently posted including one just added Friday.
• 2 more will be posted Monday morning.
• Those 7 companies report earnings starting after market close Monday.
So don't miss your chance to beat Wall Street to the punch and make the most of the potential double-digit price pops. Our signals predict big positive surprises and they've been right a remarkably consistent 78.68% of the time!
Bonus: Another reason to look into this right away is that you are also invited to download our just-released "Early Warning Alert" report. It reveals Stocks to Sell BEFORE They Report Earnings in the Coming Week. Our strategy works both ways, and you can use this report to avoid companies that are more likely to report negative surprises from July 20-24.
See our Surprise Trader stocks and “Early Warning Alert” now >>
Wishing you great financial success,
Dave Bartosiak is Zacks' resident earnings surprise expert. He selects stocks and delivers daily commentary for our Surprise Trader portfolio.
Click to get this free report
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Zacks Investment Research
The views and opinions expressed herein are the views and opinions of the author and do not necessarily reflect those of Nasdaq, Inc.