We are in the middle of earnings season and here are some of the things to look for in earnings:
- During the earnings season hundreds of companies announce earnings.
- Most of those earnings are of no use.
- What you need to look for is a game changing earnings.
- Only 1 or 2% of the companies will have earnings which are really worth jumping into immediately.
- Also you must look at where the earning is in its earnings cycle.
- Your primary objective to is to find stocks in early phase of their earnings acceleration cycle.
- In the stock has been rallying and this is the third or fourth earning acceleration then it has been already priced into the stock.
- Prior price neglect is extremely critical when looking at earnings.
- Ideally you should be looking for stocks with 3 to 4 months or more of neglect.
- When you look at the company earnings look at the magnitude of the earning surprise.
- On a day-to-day basis, many companies beat earnings by one or two cents.
- Those companies are not worth a second look.
- Also when looking at the earning look at it whether there is the analyst estimate on it.
- Primary look for companies with no analyst estimate or only 1 or 2 analyst covering the stock.
- If the company doesn't have analyst estimate it tells you that it is a neglected company.
- If the company has analyst estimate then you should look for consensus earning numbers or Whisper numbers.
- If a company beats consensus earnings estimate by a wide margin then it is attractive candidate.
- You also made to look at whether company preannounced earnings or guided higher.
- In such cases, the real earnings announcement does not move the stock.
- How you look at earnings also depends on your trading style.
- If you're primarily a daytrader, then any earnings beat is worth looking at.
- But if you're looking for a longer duration move then you need to concentrate on extreme earnings. Extreme earnings growth of 100% plus from a big base.
- Companies over the years have become better at managing their earnings.
- So, they skillfully manage investors expectations.
- They preannounce or guide higher or lower the guidance ahead of the earnings so that there is no earnings shock.
- In spite of such earnings expectation management, earnings surprises happen.
- That is where the opportunity is