How to profit from earnings surprises

This week is the official start of a new earnings season. Alcoa will kick off the season. Over next 6 weeks bulk of the companies will declare their earnings.

Earnings drives stock prices. Especially if there is surprisingly good or surprisingly bad earnings. After such big surprise stocks go up not for a day but sometimes for months or year or more. This phenomenon is well known and is called PEAD.

PEADS stands for Post Earnings Announcement Drift. PEAD is a well known and heavily researched market anomaly. PEAD stocks show tendency to drift up or down for next 60 days.

Such earnings surprises can result in big move as a result entire industry and ecosystem has developed to predict earnings. Analyst try and estimate earnings. Trends in analyst earnings estimates itself leads to many stocks rallying or dropping in anticipation of earnings. Inspite of best efforts of analyst earnings surprises happen every season.

Especially for small cap stocks earnings surprises are common. These stocks most often are neglected and have no analyst coverage or little coverage. When they come out with blowout earnings, it can result in explosive rallies. Small caps also tend to have more volatile earnings. For a company with small earnings or sales base a small improvement can lead to big surprise.

The earnings season offers speculators opportunities on both long and short side. Look for big earnings surprises on small stocks. Especially if the stock has not been rallying in to earnings and has been trading quietly for months pre earnings, it can make explosive move on earnings.

If you want to find potential market leaders and future growth stars play close attention to earnings season. A unknown company that suddenly starts growing rapidly comes to notice during such season.

There are several free sources of earnings. The key is to look for the earnings outliers. At times an earnings surprise can lead to 100 to 500% plus move in next few months, so stay focused during this season of opportunities.

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