Best Way to Make Money on Earnings Surprises

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David Bartosiak - Editor

Best Way to Make Money on Earnings Surprises

By: David Bartosiak
January 14th, 2023

This may be one of the most important earnings seasons in a long time.

Finally, a pause in the red hot CI numbers has given investors a sense of security. But, you and I both know, it's only a matter of time before the Fed throws a cold bucket of water on our parade. The Fed has committed to not only continuing to increase rates, but they are bent on sticking with higher rates "for an extended period of time."

It's also a New Year, and with that, new opportunities for profits. Who would have known heading into this year that energy stocks would do so well while the titans of tech would tumble? We are going to have to read the tea leaves early on in the season to figure out where the opportunity is.

This also sets investors up for huge risk this earnings season. Will the hawkishness of central banks around the world continue to choke out the market? Or will inflation continue to reel in a bit, giving investors hope that the end will eventually show up and growth can return without the looming specter of inflation?

Most of the major market averages have bounced off the lows. However, overhead resistance is beginning to rear its head. Can the market take out these long-term moving averages in the face of such a hawkish Fed and lowered prospects for growth?

There are a litany of reasons for investors to be concerned. But, there is a silver lining to this cloud. If corporate earnings are better than expected, then it should act as a catalyst, propelling stocks off the yearly lows. On the other hand, if profits fall short, then stocks are likely to experience an even deeper correction.

That is the story for the overall market. As for individual stocks, there will be big winners and losers depending on the strength of their reports. This brings to mind one of the most confusing things about earnings seasons:

Why do some stocks skyrocket on a positive earnings surprise while others fall off a cliff?

In this article, we are going to discuss this issue so that we can try to better understand it.. Even better, I'm going to share with you two ways to profit from surprises this earnings season. More on that later.

3 Reasons Stocks Can Drop After a Positive Earnings Surprise

1.Estimates vs. Expectations: The standard definition of an earnings surprise is when actual earnings come in higher than earnings estimates. But those estimates are the "published" numbers from the brokerage analysts. Quite often, investors tend to develop their own unique set of expectations that can differ greatly from the Wall Street analysts. If there is too much optimism ahead of the release, then actual earnings will need to be a blowout in order to appease investors' inflated expectations. This is the most common reason why some stocks fall after a "supposed" earnings beat.
2.Quality of Earnings: The highest quality earnings come from having robust revenue growth. This means that the company's products or services are in high demand and should stay that way into the future. However, these days far too much of the earnings being reported are generated from cost cutting and other "accounting gimmickry". The problem with this is that the benefits of these moves don't last. When the market gets a whiff that the earnings are unsustainable, no matter how strong the beat, shares will most likely drop.
3.Forward Guidance: Plain and simple, when you buy a stock you are taking an ownership stake. And what owners of companies care about is the stream of future earnings. So if a company beats earnings for the quarter just reported, but warns that future quarters will see lower earnings, then that stock will go down... and go down fast

2 Ways to Make Money on Earnings Surprises

So now that we have outlined things that can go wrong after an earnings surprise, let's shift gears and talk about something even more important - how to turn a profit from earnings surprises. Here are two ways to go about it.

More . . .

Good Way: Buy shares in any company that had an earnings surprise and rose the day following the news. These stocks experience what academics call the "Post Earnings Announcement Drift". Studies clearly show that these stocks usually outperform the market over the next 9 months. Conversely, you should sell any stock in your portfolio that misses its earnings numbers as it is likely to underperform the market for the next few quarters. The downside of this approach is that there are literally thousands of stocks to choose from every quarter.

Best Way: Find stocks where the earnings "whispers" tip you off that a big surprise is coming. Buy the shares shortly before the announcement, and enjoy quick gains of 10%, 15%, even 20% when the earnings surprise is officially reported.

I know what you're thinking. There are no Magic 8-balls for the stock market, so how can this be possible??? But fret not - this isn't a magic show. It's pure science.

The concept of finding a profitable source of earnings whispers has long been the Holy Grail of stock investing. Many experts have tried and failed to make this work. In fact, we had been researching this for countless years.

Early on we found clues that identified stocks more likely to surprise, but not necessarily rise in price. It wasn't until the summer of 2010 that we discovered the right combination of elements. Since refinements were made in 2014, the system has correctly called POSITIVE surprises a whopping 81.39% of the time, with the vast majority accelerating in price.

The Easy Way to Apply This Breakthrough

Here's the challenge: In each earnings season, including the current one, there are hundreds of stocks that are likely to achieve positive surprises.

This is why our Zacks research team poured so much effort into creating a special strategy that uses additional filters to narrow down the lists. It detects rare companies that are most likely to both beat earnings and jump in price.

This drives the portfolio I am managing called the Zacks Surprise Trader.

I can't share all the details of the secret formula with you, but our system relies on two under-used 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 look inside our Surprise Trader portfolio ASAP.

Now is the absolute best time to do it. From 1,133 companies scheduled to report earnings in the next three weeks, I have locked onto a small handful of standouts predicted to exceed expectations when their earnings reports are released.

New Surprise Stock to Post After the Market Opens Tuesday Morning

Check our live recommendations right now, and be first to view the one I'm adding Monday. You can take advantage of ripples of buying even before a company reports earnings.

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 81.39% of the time!

Even in 2022, the most bearish year since 2008, Surprise Trader nailed 21 quick double-digit gains. For example, +62.5%, +24.3%, +59.8%, and +19.5% in as little as 10 days.²

Bonus Report: 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 Weeks. Our strategy works both ways, and you can use this report to avoid companies that are more likely to report negative surprises from January 17-27.

But don't delay. Our "surprise" recommendations are generally closed to the public. Today the portfolio is open again, but your chance to gain access ends on midnight Monday, January 16.

See our Surprise Trader stocks and "Early Warning Alert" right now »

All the Best,

David Bartosiak - signature

Dave Bartosiak is Zacks' resident earnings surprise expert. He selects stocks and delivers daily commentary for our Surprise Trader portfolio.

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