There is no such thing as a perfect strategy or foolproof formula in trading. Believing that there is is one of the most common causes of disaster, both in the dealing room and at home. If you believe something to be infallible, then when it does go wrong (and it will at some point) the temptation is to wait for it to bounce back.
You find yourself saying things like “the market is wrong” and refusing to take a loss until you have no choice. That is how accounts are destroyed and jobs are lost.
That said, though, some patterns repeat often enough that they are worth investigating further, and when the repetition has a logical basis it is reasonable to assume that it will continue. One of the most frequently repeated patterns is how a stock performs after earnings, relative to the initial move.
Some, like MSFT below, tend to retrace following post-earnings moves:
Others, like SS&C Technologies (SSNC), do the exact opposite. A sharp reaction to earnings in a stock like that is usually just the beginning of a momentum driven move that can last for several weeks, or even longer.
There are logical reasons why that happens in this case. SSNC is relatively illiquid, so tends to react a lot to news. That puts a squeeze on wrong positions, and as they are unwound over the next few days, momentum builds. The big move also brings more attention to the stock, and new traders and investors join in, adding even more pressure.
So, after jumping over ten percent on earnings at the end of last week, then retracing a few points over the next couple of days, SSNC looks like a buy at current levels based on the technical picture.
Fundamentals support that view as well.
SS&C is a software company, but they specialize in the financial and healthcare industries, both of which are growth areas in tech. They are getting more than their fair share of that growth, with year on year earnings up over 66% on revenue that was over fifteen percent up on the same basis.
The numbers suggest that that growth still isn’t priced into the stock, even after the pop. SSNC has a forward P/E of just over 14, well below the market average, and a PEG ratio of 0.87. The PEG ratio looks at P/E in relation to growth, and anything under 1 indicates value. This, however, is not a company that is pursuing growth at all costs. They are letting it come naturally, while still generating over $1.1 billion of free cash flow.
Buying SSNC is not a perfect trade. As I said, there is no such thing, but it is one where the odds are in your favor. It has shown a tendency in the past to consolidate post-earnings moves and represents a rare case where the stats indicate both good growth and value at current levels. That makes it worth considering, if nothing else.
The views and opinions expressed herein are the views and opinions of the author and do not necessarily reflect those of Nasdaq, Inc.