10 things to know about trading earnings | stockbee

7/20/2007

10 things to know about trading earnings

  1. Accept that it will take time for you to understand and be confident in it. It will take you 2 earnings season to fully grasp how this thing works and what is the potential and why some of the smartest traders on the street trade this strategy or variations of it.
  2. The earnings data by both IBD and WSJ is sometime erroneous. But overall IBD data base is good. IBD does all the onetime adjustments to earnings, while the WSJ data often does not. But IBD data is day old.
  3. You need to understand what neglect means in terms of previous price growth, trading volume, float etc. The strategy works best on unknwon, neglected stocks with no analyst coverage.
  4. You need to understand acceleration. Stock might have 100% plus earnings, but that may not be acceleration.
  5. Understand stocks earnings cycle. Where does this earnings fits in in overall stocks earnings cycle for last 2 or 3 years. If this is a sudden acceleration after string of below average earnings, you will get kaboom rally.
  6. It is not a day trading strategy. The objective is to capture the rally set off by the event. Most of these stocks will have more rallies after pullbacks/ corrections, so keeping a watch list will give you many more opportunities in these stocks.

  7. AKS,Ak Steel Holding Corp (Google Yahoo Earnings Chart)
    AP,Ampco-Pittsburgh Corp (Google Yahoo Earnings Chart)
    ATRO,Astronics Corp (Google Yahoo Earnings Chart)
    BGC,General Cable Corp (Google Yahoo Earnings Chart)
    BTJ,Bolt Technology Corp (Google Yahoo Earnings Chart)
    CALM,Cal-Maine Foods Inc (Google Yahoo Earnings Chart)
    CHAP,Chaparral Steel Company (Google Yahoo Earnings Chart)
    CKSW,Clicksoftware Technlgies (Google Yahoo Earnings Chart)
    CROX,Crocs Inc (Google Yahoo Earnings Chart)
    GNK,Genco Shipping & Trading Ltd (Google Yahoo Earnings Chart)
    GROW,U.S. Global Invest Inc A (Google Yahoo Earnings Chart)
    ICE,Intercontinental Exchange Inc (Google Yahoo Earnings Chart)
    IIG,Imergent Inc (Google Yahoo Earnings Chart)
    MICC,Millicom Intl Cellular Sa (Google Yahoo Earnings Chart)
    MOS,Mosaic Company (Google Yahoo Earnings Chart)
    NGA,North American Galvanizing & Coatings Inc (Google Yahoo Earnings Chart)
    PRXI,Premier Exhibitions Inc (Google Yahoo Earnings Chart)
    RS,Reliance Steel & Alum Co (Google Yahoo Earnings Chart)
    SLP,Simulations Plus Inc (Google Yahoo Earnings Chart)
    TRCR,Transcend Services Inc (Google Yahoo Earnings Chart)
    TTES,T-3 Energy Services Inc (Google Yahoo Earnings Chart)
    WNR,Western Refining Inc (Google Yahoo Earnings Chart)

    These stocks had first earnings acceleration of triple digit or more more than a year and half ago, they are in my watch list and I have traded them in and out. See what is their price growth in last 2 years.
  8. There are many ways to trade earnings. This is just one of them. You can trade pre earnings drift, you can trade analyst earnings revision trends, you can trade, earnings miss from long side, you can trade earnings from short side. That is what the big and smart money on the street does. Merrill Lynch periodically surveys institutional money managers to find out how they pick stocks. The number one factor in that survey is earnings momentum.Earnings momentum, mean that the managers look for stocks with accelerating earnings growth, increasing earnings forecasts, and recent positive earnings surprises.
  9. Post earnings announcement drift (PEAD) has been researched to death and proven to work across market. So there is strong research basis to why it works. Good earnings are followed by more good earnings.
  10. There are no formulas for instant riches. You have to make any concept work. Only people who promise instant riches and out of box solutions are black box sellers and newsletter writer. If you make the concept work you might be surprised at what you can make.
Related post: Trading Earnings

15 comments:

Jack said...

excellent post

thank you for your research and sharing it with this blog.

successful trading,

jack

Dan said...

Can you clarify a few things on entering a stock:

1. If the stock doesn't move up (CBST) you get out after a few hours to free the money up for the next one?

2. If the stock moves up the first day then stays flat over a 5 day period you get out?

3. On earnings announcements after close...how do you figure out what price to enter the next morning? Do you wait til it opens and track it to see the range or just get in with a market order?

I'm guessing all of these rules are tweaked to fit comfort levels amount of cash to work with for each person...

Dan said...

Been fussing around with telecharts this morning and was wondering if you had any ideas on calculating the start of a sector rally? I'm thinking something like 5% or more gain in a 30 days?? where 65 day growth have been flat or negative.

Would it be better to track against the s&p 500? For instance a sector that starts outperforming the s&p by a certain percentage?

thanks,
Dan

Pradeep Bonde said...

1 Yes. All good earnings trade will rarely pullback after 11 a.m below their open price. If that happens I get out.

2 Yes. I get back in if it has 4% breakout later.

3 There will be after hours trading in it. Which tells you approximately where it will open. I work with a rule of thumb that it will open 10% plus if it is good earnings trade.If it is below 10 million float, my rule of thumb is up to 20% open gap. For higher float 5-7% gap. Well known stocks have pullback in morning, so I buy them post pullback.
I have the stocks on my real time watch list, so there is some judgment involved.

Pradeep Bonde said...

Sectors are best tracked by individual stock moves. Sector trends are often visible in hindsight. Sector tracking based on average price of component stocks is always going to lag. Averages are by nature lagging indicators. Best way to track sector is to look at 4% plus breakout list and watch trends in them.
The other way to track sector is by using the IBD number of stocks from sector making 52 week high list.

In Telechart you can try
( (2 * C * 100 / C5) + (2 * C * 100 / C25) + ( C * 100 / C40) ) / 5
To sort the sector. This will give you faster signal.

Prashant said...

Pradeep,
You have mentioned about the amount of risk that you take on each of these trades (I believe it's 1-2%), as well as the stop loss criteria (low of two days or the low of the daily bar if it was a gap up). I guess these and other money management stuff deserve a special post. I think that's one of the most important things while trading. Also, if you can share any psychological stuff, discipline, etc. that will be nice too. Thanks.

Art said...

Good questions, and great answers which is now beginning to fine tune some of what you taught us early in the beginning of your blog Paradeep.

I had many of the same questions, but just didn't know it.

Thanks once again for a tremendously important blog Paradeep. Know we truly appreciate your hard work teaching us.

Art

Rhonda said...

"You need to understand acceleration. Stock might have 100% plus earnings, but that may not be acceleration."

Hi Pradeep,
Can you explain what the difference between 100% plus earnings and 100% acceleration is? Thanks in advance and thanks for all the knowledge I have gained from your postings.

Rhonda

Rhonda said...

Another question-
I have been reading some of your older posts trying to get a grasp on concepts. I read your post referring to barcharts.com for episodic pivots and momentum. One of the stocks that has been showing momentum is RDTA. I did not double check if this stock is showing up on your recent break out scan but what I am wondering is how I digest a stock having 4% breakout when it appears earnings were not good?
Thanks.

Pradeep Bonde said...

100% earnings growth is compared to last quarter same yea. But stock may not react as earlier quarter growth might be a sequence like 230, 210, 200, 180 and then 100. So one hasto look at earnings life cycle over last 8 to 12 quarters.

RDTA too low a volume to pass my filters.

Gnib said...

I would echo prashant that money/risk management and entry/exit deserve a special post.

I am also thinking over on what Pradeep said the other day "Insurance, banks, financials generally do not make good earnings play candidates". Could it be that they sometimes can have one time or one quarter earnings wonder? Financials in fact were very strong over the last 5 years. GS was a great example, it was a earnings play too.

However, industry wise, the real estate downturn may cast grave concerns on financials, esp. banks. Do you have comments on this?

What else are not good earnings play candidates? or What are good ones? Thanks a lot, Pradeep.

Gnib said...

I'd like to share my earnings plays over the last one and half week.

I had four, actually five if counting OMCL. Three still holding, two already out.

First is MTL, a Russian Steel/iron company. It reported earnings on July 11th morning, 200%+ income, 60%+ revenue. It's got 7 analyst coverage, and it's at all time high, so it's not neglected. But I liked the earnings, and it's my first time too, I was nervous, so I used limit order, the price was going down after the gap up, I kept lowering the limit price, :-). finally got filled when it started to swing up a little @43.90. It closed a little bit over 44. The next day, it went up as high as 47.8, I sold 2/3 at 47.5. Right now it's down to 43.90, I plan to get out if it drops again to below 43.

The second one is the most successful. ARTW, farm machinery, 250% income, 30%+ revenue. It's got on analyst coverage, but it's at the all time high, so not too neglected either. I used limit order early morning, got in at $14.9, and it immediately went up and never looked back. However the volume is probably too low for Pradeep. I took profit 1/2 at the end of day at $17, plan to keep the rest if it doesn't drop to below $15. This one is easy to manage since it went up right away.

The third one, RLI, great earnings too, property insurance company. I saw it shooting up right after the open (the previous day after hours got as high as 58.8), I used market order to fill at 59.50, after reaching 61.50, it dropped down hard, I got all out at 60.30, and it's still going lower, now at 59.30.

QEPC, this one gave me a big loss. I entered right after open at 11.80, it shot up to 12.40 and dropped down hard, I should have bailed out immediately, but I saw the huge volume, thinking it may reverse after the morning weakness, but it never did, I eventually got out at 11.10. This one kept going lower the next day. What's the better way to manage it, would anyone re-enter it after it broke out some level say 11 again, which it did? Thanks in advance!

The fifth one, OMCL, not exactly an earnings play, since its real income gain is not 748% as listed on WSJ online, it's got some one time tax benefits, real gain should be 70%, still good, but below Pradeep's threshold. However, I especially like the weekly chart, which forms a big cup and handle over the last three years. This is a breakout from it, but the market gapped down at open, so I waited for a while, seeing it consolidate after 11am, I entered it at 23.8. I will use a stop of 23.3, see if it can run.

Also, I missed DYII, it was on my watchlist, but my attention was mostly on ARTW that day, and DYII reported earnings at 12pm, so when I saw the news, it's already gone. However it did offer an excellent entry point after the pullback to 6.3-6.5 area, but I am a newbie, too chickened to enter at such high level ($2 popped to $7), even it broke the descending trend line midday.

Alright, this sums up my earnings play for the last 10 days. Please make comments, criticism and suggestions, so I can learn more from all you guys. Thanks a lot!

Tim said...

Gnib - seems like you are trying to daytrade the earnings play.

Gnib said...

Thanks, Tim. Do you mean that I paid too much attention to the intraday price action? How would you have dealt with those stocks?

Pradeep, what's the best way to check earnings acceleration? i.e. earnings data for the last 8+ quarters?

Would someone please comment on SYNL's poor reaction to its excellent earnings? sector weakness or too much expectation? It actually was down a lot pre-earnings. Thanks!

Pradeep Bonde said...

Everyone adopts a concept to fit their style. So there is no one way to play it. As long as you keep risk controlled and make money, anything is ok.
Earnings acceleration just means above trend line rate of growth. So a stock is growing earnings at say e.g. 12, 10, 13, 12, 13, 56, 60, 40
There was acceleration.